Reuters News - Global Economy: Surprise tactics sweep central banking

(Reuters) - After slashing interest rates to almost nothing and printing trillions of dollars, central banks are becoming increasingly reliant on another policy weapon: sucker punchingmarkets.

The European Central Bank shocked investors and forecasters last Thursday by cutting its main refinancing rate to a record low, reacting to a shock decline in inflation.

It was the second big central bank surprise in less than two months, after the U.S. Federal Reserve decided in September not to trim its monthly bond purchase stimulus.

And beyond the immediate impact on financial markets, central banks' shock therapy tactics have also had a lasting effect.

The yield on the U.S. 10-year Treasury bond -- one measure of government borrowing costs -- fell sharply in the aftermath of the Fed's decision, and it shows no signs of revisiting September's peaks for the year any time soon.

The ECB's rate cut helped weaken the euro more than 1 percent against the dollar, and most economists polled by Reuters reckon it will put the currency on a firmly lower path from here -- huge help for the fragile euro zone recovery. <ECB/INT>

With scant room left to cut interest rates again and appetite for more rounds of money printing waning, economists say surprising markets will increasingly feature in policymaking.

"It makes sense that with the artillery becoming depleted, central banks want more bang for their buck now. One way of doing that is to launch surprises in markets," said Philip Shaw, chief economist at Investec in London.

"It wouldn't be a shock if the ECB was pleased that it surprised markets," he added, noting the ECB managed this without breaking its guidance to keep interest rates low or lower for an extended period of time.

AN OLD TOOL, BUT A GOOD ONE

Jolting markets with an unexpected decision has always been in the central bankers' toolkit.

Germany's Bundesbank, for instance, was famed for its sudden moves when it set monetary policy for Europe's biggest economy in the pre-euro days, said Elwin de Groot, senior market economist at Rabobank in Amsterdam.

But there are good reasons why bolt-from-the-blue policy moves are even more effective today.

"In recent years, the trend in central bank policymaking has been for more transparency, more guidance, and trying not to surprise the market," said de Groot.

"But occasionally you can surprise, and it works better. It keeps the market sharp; it sends a strong signal to the market that its assumptions were wrong."

This year has been peppered with such instances.

Back in April, economists expected the Bank of Japan would ease policy -- but few dreamed it would unveil a plan to unleash $1.4 trillion worth of monetary stimulus into the economyover less than two years.

And wrong-footing markets has become a defining policy tool for the ECB since Mario Draghi became its president.

The ECB cut rates unexpectedly at the first meeting where Draghi was in charge, two years ago this month.

His shock announcement last July that the ECB would take on rising government borrowing costs and do "whatever it takes" to save the euro proved decisive in easing the region's debt crisis.

It remains to be seen whether Draghi's incoming counterpart at the Fed, Janet Yellen, will share his penchant for surprise.

Markets might get a better sense of that when the U.S. Senate Banking Committee vets Yellen's nomination as Fed chairman on Thursday to replace Ben Bernanke, whose term expires on January 31.

In a quiet week for international economic data, focus will also rest on the Bank of England's quarterly Inflation Report outlook for the UK economy, due on Wednesday, the second since Mark Carney's appointment as governor.

"What markets will be looking for is where the new forecasts lie, and in particular, where the Monetary Policy Committee views the unemployment rate is going," said Investec's Shaw.

The Bank of England left interest rates at record lows on Thursday, but is likely to suggest next week that borrowing costs could rise sooner than it had forecast as the economic recovery gathers pace.

BBC News - EU and US to resume trade deal talks

The EU and US are to begin a second round of negotiations towards creating the world's biggest free-trade deal.

The EU says a trade deal would bring economic benefits to its 28 members

Talks on the Transatlantic Trade and Investment Partnership (TTIP) had been set for October, but were postponed because of the US government shutdown.

Relations have become strained after claims that the US listened to German leader Angela Merkel's mobile calls.

US Secretary of State John Kerry last week urged European leaders not to allow the row to disrupt the talks.

Together the US and EU account for about $30 trillion (£18.7tn) of annual output - almost half the world's total.

The EU says a deal could bring annual benefits of 119bn euros ($159bn; £99bn) for its 28 member states.

It is hoped that an agreement could be reached by the end of 2014.

Holger Schmieding, chief economist at Berenberg Bank, told the BBC Radio 4 Today programme that it would be "very good news for economic growth in years to come".

Mr Schmieding said one area where agreed standards could help bring down costs was in the automotive trade, if the US and Europe could decide on agreed standards for cars.

However, he says that potential stumbling blocks include the areas of personal data protection and GM foods.

Others have said a deal could weaken existing strong consumer laws on both sides of the Atlantic.

A third round of talks is scheduled for 16-20 December in Washington.

This week's talks cover services, investment, energy and raw materials.

EU negotiator Ignacio Garcia Bercero and US counterpart Dan Mullaney will give an update on talks later this week.

Reuters News - Cash floods into property as investors seek alternative or safety

A man passes advertising for new flats under construction in west London October 25, 2013.

Credit: Reuters/Luke MacGregor

By Jamie McGeever

(Reuters) - Five years after the global financial crisis was sparked by a burst U.S. housing market bubble, property is booming again and even considered a safe-haven investment.

With many equity markets at record highs, government bonds offering scant returns and emerging markets looking fragile, investors are flocking to residential and commercial property.

Property offers relatively high returns, making it an attractive alternative to stocks and bonds.

Institutions managing commercial real estate portfolios in Britain and around Europe expect yields of between 6 and 10 percent, compared with a 10-year British gilt yield of 2.65 percent or just 1.7 percent for the equivalent German bond.

It offers an avenue for investors to diversify their portfolios and a hedge against potential inflation.

For some, particularly in emerging markets, property rights and the rule of law in developed economies also make bricks and mortar a secure place to park their money, even if pockets like the high-end London market look overheated.

"Since the end of May, we've seen a big increase in the volume of U.S. capital looking at Europe, and Asian sovereign wealth funds are interested too," said Simon Martin, partner at Tristan Capital, a private equity firm focusing on commercial real estate.

These are big investors looking to sink 50-150 million euros into projects, Martin said. And hisbusiness is now "enquiry-driven", rather than a matter of flying round the world seeking out interest.

Martin says Tristan's fund is selective, and hopes to double investors' money over four years or so.

SAFER THAN UNCLE SAM?

But it's not a one-way bet. Banks are lending less as they continue to shrink their balance sheets, while borrowers will have to refinance around 150 billion euros of commercial real estate loans across Europe in the next few years. Falling real wages continue to be a drag on economic growth.

Fears of a bubble are rising as house prices soar in some regions, even in non-traditional hot spots like Germany. That has prompted action by regulators in several countries to cool overheating markets.

Some figures are eye-watering. Asking prices from home-sellers in London rose 10 percent in a single month in October, prices in China are rising at their fastest rate in three years, and the German central bank has warned that apartments in big cities may be over-valued by as much as 20 percent.

Meanwhile, the first bond backed by home-rental cash flows, a $300 million asset-backedsecurity from private equity giant Blackstone (BX.N), has been given a triple-A credit rating.

That means a bond backed by the rents from foreclosed properties in the United States that a private equity group bought up after the market crash is deemed as safe or safer an investment than bonds issued by the United States itself.

"We're certainly not complacent," said Chris Taylor, chief investment officer at Hermes Real Estate, a 5.9 billion pound UK property fund under the 25 billion pound umbrella of Hermes Fund Managers.

Taylor noted that while the hunt for yield will boost demand, property's long-run fundamentals are driven by how the real economy affects occupiers.

FUND FLOWS

Despite these red flags, money is flowing into global property funds.

Figures from Lipper show assets under management in property funds around the world increased by $29.8 billion in the first nine months of this year to $452.6 billion, a rise of 7 percent.

Japan has seen the biggest increase, followed by Europe, the United States and Britain, according to Lipper.

The Lipper data shows that Japanese property funds have performed best so far this year, posting a cumulative gain of 22 percent in the nine months to the end of September.

These flows might not sound massive when set against the value of all assets under management, which last year stood at $62.4 trillion.

A Reuters poll of 53 fund managers showed property accounted for only 1.6 percent of their global balanced portfolio in October, and that allocation has remained within a tight range of between 1.3 percent and 2 percent for the last four years.

But the size of the global stocks and bonds universe means it takes only a fractional shift in flows to unleash potentially significant changes in prices for smaller asset classes like property.

And there's plenty scope for that to happen.

"There's widespread under-allocation to real estate," said Bill Hughes, managing director of Legal & General Property, an 11.5 billion pound property fund management platform under the Legal & General umbrella.

Hughes said certain areas of the British property market, notably prime residential property in London, into which most overseas capital is being poured, looked overheated.

But his business is attracting growing interest from investors in Asia, the Middle East and Europe, a trend he believes is believes will continue for the "foreseeable future".

As overseas money comes to Britain, so UK-based investors are looking abroad.

"Investors are attracted by the relatively high yield that bricks and mortar provide. There's a craving for yield, particularly from long-term pension schemes," said Taylor at Hermes Real Estate.

British Telecom's (BT.L) pension fund, one of the biggest in the country, has its money in Hermes funds.

Taylor's real estate fund is 87 percent invested in the UK. But his longer-term strategy is to be 30 percent overseas, particularly in developed markets like the United States, Northern Europe,Australia and selected markets in Asia.

(Editing by Catherine Evans)

Reuters News - UK service sector grows at fastest pace in 16 years

A woman pushes a sandwich cart past St James's Palace in London October 23, 2013.

Credit: Reuters/Toby Melville

By David Milliken

(Reuters) - Activity in Britain's services sector increased at the fastest rate since May 1997 last month, raising the prospect of a big jump in economic growth in the final three months of 2013, a closely watched survey showed on Tuesday.

Financial data company Markit said its services purchasing managers' index rose to 62.5 in October from September's 60.3, easily beating economists' forecasts for a fall to 59.8 and increasing the chance that the Bank of England will revise up its quarterly growth forecasts next week.

Readings above 50 point to growth, and Markit said that combined with strong PMI surveys for manufacturing and construction, Tuesday's data suggest quarterly economic growth of 1.3 percent, up from 0.8 percent between July and September.

"The UK economic recovery moved up a gear again in October," said Chris Williamson, chief economist at Markit.

"Manufacturing, services and construction all continued to see very strong rates of expansion, pointing to an ongoing broad-based upturn. However it is the services sector which, due to its sheer size, is the major driving force," he added.

Britain's economy - which looked on the verge of its third recession in five years at the start of 2013 - has repeatedly surprised on the upside this year, and Markit's composite PMI is its highest since records began in 1996.

Britain's position contrasts sharply with that of the euro zone, where last week unemployment hit a record high while the annual inflation rate tumbled, bringing a possible European Central Bank interest rate cut into view.

However total UK output is still well below its 2008 peak - a much weaker state of affairs than in most other big advanced economies - and in August the BoE pledged not to raise interest rates before unemployment falls to 7 percent.

The BoE forecast in August that Britain's jobless rate - now 7.7 percent - would take more than three years to sink that low, a timescale many economists think will be brought forward when the central bank publishes fresh forecasts next week.

The Markit survey showed that employers in the services sector were hiring staff at the fastest rate since May 1997. A broader composite employment index, which includes manufacturers and construction firms, rose to its highest since that series started in January 1998.

PUBLIC SECTOR AND CONSUMERS UNDER PRESSURE

Markit's surveys do not cover the UK public sector - where more cuts to jobs and spending are planned as part of the government's austerity programme - or British retailers, who have had mixed fortunes due to falling disposable income.

The British Retail Consortium, which represents larger chains, said earlier on Tuesday that its members experienced modest annual sales growth of 2.6 percent in value terms in October.

However, prospects for the rest of the services sector appear brighter. The services PMI's new orders component rose to 63.4 in October from 60.6 in September, indicating the fastest inflow of orders since the survey started in July 1996.

Firms reported getting longer-term contracts than before, and that some were linked to growing activity in Britain's property market, where the government has announced several measures aimed at boosting construction and home purchase.

The services PMI also pointed to potential future inflation pressures. Firms reported that they were reaching capacity constraints, with backlogs of work rising at the fastest rate since May 1997, and that as well as hiring more staff, they were also raising salaries.

Firms faced the biggest rise in input costs in eight months, and raised the prices they charged to consumers at the fastest rate since May 2011.

Bloomberg News - China’s Leaders to Start Reform Summit With Recovery

China’s Communist Party leaders will enter a policy-making summit this week with the economy on an upswing, services and manufacturing surveys show.

A non-manufacturing Purchasing Managers’ Index (CPMINMAN) rose to the highest level this year in October, a government report showed yesterday. The increase follows faster-than-estimated growth in two manufacturing indexes last week.

Signs of sustained strength in the world’s second-largest economy may give President Xi Jinping and Premier Li Keqiang more confidence in tackling reforms. At the same time, excessive credit growth, rising local-government debt and weaker export momentum may cap a stronger recovery from a two-quarter slowdown.

“Growth momentum will still be relatively robust” in the fourth quarter, said Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong. “The government will tone down its pro-growth rhetoric but there won’t be a significant tightening of monetary policy as new leaders still need a stable economic and financial environment to consolidate their power base.”

The benchmark Shanghai Composite Index was little changed at the close, as property stocks declined amid concern the nation will introduce more measures to curb home prices.

Lu estimates gross domestic product will rise 7.7 percent in the fourth quarter from a year earlier, down from 7.8 percent in the July-September period.

China’s top party officials will meet in Beijing from Nov. 9-12 to map out a blueprint for reform as the country heads for its slowest growth in more than two decades.

Balance Growth

GDP will increase 7.6 percent this year, according to the median estimate of 52 economists surveyed by Bloomberg last month. That’s down from 7.7 percent in 2012 and the same pace as 1999, which was the weakest expansion since 1990. Growth may slide to 7.4 percent in 2014, according to the median projection of 47 analysts.

Premier Li reiterated that the government must balance the need for economic restructuring with a reasonable pace of growth to ensure sufficient employment, China National Radio reported yesterday, citing comments he made at a meeting with academics and business leaders.

The non-manufacturing PMI rose to 56.3 in October from 55.4 in September, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday. A number more than 50 indicates an expansion. HSBC Holdings Plc and Markit Economics will release a services PMI for October tomorrow. Their index (SHCOMP) fell to 52.4 in September from 52.8 in August.

Too Bullish

“The room for a further improvement in the non-manufacturing PMI is limited so we should still avoid being too bullish,” Lu said, pointing to a decline in new orders and a contraction in export orders in yesterday’s report.

A manufacturing index from HSBC and Markit rose to the highest level since March in October, according to a Nov. 1 report. The federation’s gauge advanced to an 18-month high driven by faster output, while measures of new orders and export orders declined.

“Like the manufacturing PMI, activity in the non-manufacturing PMI appears to have run ahead of demand,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong, pointing to a 1.8 percentage point drop in the new order sub-index in yesterday’s report and a widening gap between a gauge of business activity and new orders.

“Unless demand catches up, this pace of activity expansion will not be sustainable,” he said.

Sustainable Growth

Xi and Li have indicated that the days of annual GDP expansion of more than 10 percent are over. The government will focus on policy changes to support more sustainable growth that will reduce inequality and doesn’t damage the environment.

Xi said a blueprint for “comprehensive reform” will be put forward to the third plenary session of the Communist Party Central Committee, according to a Nov. 2 report from the official Xinhua News Agency. The nation is transforming its mode of development and readjusting its economic structure through a new style of industrialization, urbanization, technology and agricultural modernization, he said.

The economy is entering a phase of “transformation” involving a slowdown in growth “from a high speed to a medium-to-high speed,” Li said in September. He has also signaled that the government’s bottom line for expansion is 7 percent, the level needed to meet the Communist Party’s target of doubling per capita income in the decade through 2020.

Elsewhere today in the Asia-Pacific region, Australia’s retail sales rose more than estimated in September from the previous month and an inflation gauge by TD Securities and the Melbourne Institute rose 0.1 percent last month from September.

European PMI

The final reading of a euro-area manufacturing PMI will probably show that the gauge rose in October from September, according to economists surveyed by Bloomberg News. The U.S. will release data on factory orders for September.

Chinese industries including leisure, e-commerce and transport are becoming a bigger part of the economy, supporting the government’s efforts to shift the focus of growth away from investment and exports. Alibaba Group Holding Ltd., China’s biggest e-commerce company, plans a fivefold increase in the number of college graduates it hires to 1,000 and may offer them as much as triple last year’s average pay.

Service industries accounted for about 45 percent of GDP last year, according to statistics bureau data, up from 41 percent in 2003. The government is seeking to increase the share to 47 percent by 2015, according to its five-year plan. In the U.S., services comprise about 90 percent of the economy.

--Nerys Avery, Sarah Chen. With assistance from Sharon Chen in Singapore. Editors: Nerys Avery, Scott Lanman

BBC News - Germany rebuffs US criticism of its growth model

Germany has hit back at US criticism of its export-led growth model, describing the attack as "incomprehensible".

The US Treasury has blamed Germany's export-led growth model for dragging down eurozone

The rebuff came after a US Treasury report said Germany's dependence on exports for growth was hurting the eurozone and the wider global economy.

It also said that domestic demand growth in Germany had been "anaemic".

But Germany's finance ministry said there were "no imbalances" in its economy and that its current account surplus was not a cause for concern.

A surplus happens when a country's income from exports is greater than its import bill.

In its report, the US Treasury said that "Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany's nominal current account surplus was larger than that of China".

'Sign of competitiveness'

Germany is the eurozone's largest economy and has been one of its key drivers of growth in recent years.

Its export prowess is seen as one of its key strengths and has helped cushion the impact of the region's debt crisis on its economy.

Germany narrowly avoided recession earlier this year, but GDP in the second quarter of 2013 was driven up by demand from both consumers and businesses.

However, the US Treasury report said that Germany's dependence on exports coupled with slow growth in domestic demand had "hampered rebalancing" of Europe's growth.

"The net result has been a deflationary bias for the euro area, as well as for the world economy," it said.

Germany refuted those claims saying that its "current account surpluses are a sign of the competitiveness of the German economy and global demand for quality products from Germany".

"The innovative German economy contributes significantly to global growth through exports and the import of components for finished products," a finance ministry spokesman was quoted as saying by the Financial Times.

BBC News - US criticises Germany and China policies

The US has criticised Germany's economic policies, saying that its export-led growth model is hurting the eurozone and the wider global economy.

The US Treasury has blamed Germany's export-led growth model for dragging down eurozone

In its bi-annual report, the US Treasury said that domestic demand growth in Germany had been "anaemic".

It also reiterated its view that the Chinese yuan continued to remain "significantly undervalued".

The report has criticised Chinese policy before, but criticism of German economic policy is rarer.

"Germany's anaemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment," the Treasury said.

"The net result has been a deflationary bias for the euro area as well as for the world economy."

'Bit strange'

Germany, the eurozone's largest economy, has been one of its key drivers of growth in recent years.

Its importance to the 17-nation bloc has only increased since the development of the region's debt crisis, which has affected other bigger economies such as Italy and Spain.

Germany has been one of Europe's stronger economic performers and its exports prowess is seen as one of its key strengths.

It narrowly avoided recession earlier this year, but GDP in the second quarter of 2013 was driven up by demand from both consumers and businesses.

Analysts said that while Germany could benefit from boosting domestic demand, the criticism levelled at its policies was unfair.

"I think this is a bit strange," Tony Nash, vice president at IHS, told the BBC. "The eurozone has to get growth from somewhere and Germany is the most likely place for that to happen."

"And it is better for the eurozone to have a highly concentrated, efficient and skilled export powerhouse in Germany than not have any major engine of growth," he added.

Yuan concerns

In recent years, the US and many other economies have alleged that China tries to keep the value of its currency artificially low.

They say that, by doing so, Beijing gives an unfair advantage to its exporters, as an undervalued currency makes its good cheaper to foreign buyers.

For its part, China has been looking to loosen its grip on the currency as it looks to push for a more global role for the yuan.

But Beijing has maintained that a sudden and sharp appreciation in the value of the yuan will hurt its overall economy.

The yuan has risen nearly 12% against the US dollar since June 2010.

While the Treasury acknowledged that the yuan had been rising, it said the appreciation was "not as fast or by as much as is needed".

"On the other hand, the evidence that China has resumed large-scale purchases of foreign exchange this year, despite having accumulated reserves that are more than sufficient by any measure, is suggestive of actions that are impeding market determination and a currency that is significantly undervalued," it added.

However, the report did not label China as a currency manipulator.