Bloomberg News - China Deflation Risk Deepens Signaling Room for Easing: Economy

Photographer: Tomohiro Ohsumi/Bloomberg

Shoppers walk along a shopping street in Beijing, China.

China’s factory-gate deflation deepened and consumer prices climbed at the slowest pace since 2009, signaling room for further monetary easing.

The producer-price index dropped 2.7 percent in November from a year earlier, a record 33rd-straight decline and the biggest fall since mid last year.Consumer prices rose 1.4 percent, compared with the 1.6 percent increase in October.

Falling oil and metals prices have cut costs for China’s factories, leading to lower export prices and adding to dis-inflation threats across the world. The rising risk of deflation drives up real borrowing costs, making it harder for China’s indebtedcompanies to service debts and increasing pressure on the central bank to follow up last month’s surprise interest-rate cut with further monetary easing.

“China has entered into a rapid dis-inflation process, and faces the risk of deflation,” said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “As the PBOC has exhausted its newly invented and ineffective policy tools, we believe the next move will have to be a RRR cut in order to regain policy effectiveness and credibility.”

Chinese stocks rebounded from the biggest loss in five years amid speculation the government will provide further economic stimulus.

Factory-gate prices of coal products fell 11.6 percent from a year earlier, oil and gas products slumped 13 percent and ferrous metal products declined 16.6 percent, according to a statement on the National Bureau of Statistics website.

“The major driver of the recent decline in headline inflation readings is the slump of global oil and other major commodity prices,” said Lu Ting, Bank of America Corp.’s head of Greater China economics in Hong Kong.

Oil Slump

Oil’s slide also helped push China’s trade surplus to a record in November after an unexpected decline in imports. Lower oil prices could boost economic growth and help keep inflation slow enough to give scope for further easing after last month’s surprise interest-rate cut.

“The risk of deflation in China has risen significantly,” China International Capital Corp. economists Liang Hong and Bian Quanshui wrote in a note. It will “lift the level of real interest rates, further curbing aggregate demand and in turn reinforcing deflation expectations.”

As such, the People’s Bank of China needs to relax monetary policy, including cuts in interest rates and banks’ RRR, they wrote.

China is forecast to lower banks’ required reserve ratio to 19.5 percent in the first quarter of 2015 and to 19 percent in the second quarter, according to a survey by Bloomberg News.

Global Risk

As lower commodity costs fuel the drop in factory prices, that’s in turn pushing down China’sexport prices, feeding deflation risks globally.

While most major central banks view inflation of about 2 percent as the yardstick for price stability, more than one-fourth of 90 economies monitored by researcher Capital Economics Ltd. are below 1 percent, the most since 2009. Almost half of those are already in deflation.

The moderation in China’s consumer prices reflects tepid domestic demand. Non-food inflation was 1 percent from a year earlier, while food prices increased 2.3 percent.

“Without a question, deflation has become the main risk of prices,” Xu Gao, chief economist at Everbright Securities Co. in Beijing, wrote in a note. “The root cause of this is the weak real economy.”

The job market is showing signs of stress that may trigger a second wave of economic weakness next year driven by slowing consumption, wrote Standard Chartered Plc economists led by Shanghai-based Li Wei in a note.

Wages Freeze?

“While the manufacturing sector has been losing jobs for three years, until recently growth in services jobs was enough to offset this,” wrote the economists. “This has now changed. More worryingly, our recent discussions with companies suggest that many plan to freeze wages in 2015 as a result of the slowing economy and already-squeezed profit margins.”

China’s top leaders started a meeting yesterday to map out economic plans for 2015. Economists expect the government to lower next year’s economic growth target to 7 percent from about 7.5 percent this year as it adapts to the “new normal” of a slower expansion pace.

“In the near future, the PBOC will likely remain at the forefront of the global central banks’ battle against ’low-flation’,” said Morgan Stanley analysts led by Helen Qiao in a note ahead of today’s release. The analysts said they expect more flexibility in combining interest rate and reserve requirement cuts with targeted easing measures to maintain macro stability and address structural imbalances.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net

BBC News - Oil keeps sliding on oversupply fears

The price of oil has hit another five-year low as fears of oversupply continue to mount.

A BP oil platform in the North Sea.

Brent crude was down $1.77 at $67.30 a barrel in Monday afternoon trading, having earlier hit $66.77 - its lowest since October 2009.

US crude was down $1.44 at $64.40, after falling as low as $64.14.

Morgan Stanley predicted that Brent would average $70 a barrel in 2015, down $28 from a previous forecast, and be $88 a barrel in 2016.

The investment bank also said that oil prices could fall as low as $43 a barrel next year. Analyst Adam Longson said that markets risked becoming "unbalanced" unless the Opec producers' cartel decided to intervene.

Saudi Arabia, the cartel's biggest member, resisted calls at last month's meeting to cut production despite the slide in prices, which have fallen more than 40% since June.

Kuwait, another Opec member, said that oil prices were likely to remain about $65 a barrel until the middle of next year unless Opec cut output.

Continue reading the main story

“Start Quote

We see a massive weakening in the eurozone economy”

Ewald NowotnyECB governing council member

The further falls in the oil price put more pressure on both the rouble and Russian stock markets, with the currency losing 2.2% against the dollar at 53.66 and down 1.8% against the euro at 65.80 in afternoon trading.

Some analysts believe that Russia will increase interest rates to as much as 12% this week in a bid to prevent a full-blown financial crisis.

Last week, the Russian government warned that the economy would fall into recession next year as the falling oil price and Western sanctions, in response to its role in eastern Ukraine, take their toll.

Russia's economic development ministry estimates the economy will contract by 0.8% next year after previously estimating growth of 1.2% for 2015.

China slows

Global confidence was also undermined on Monday after European Central Bank governing council member Ewald Nowotny warned that the eurozone economy was experiencing a "massive weakening", sending the euro lower against the dollar and the pound.

The head of Austria's central bank is keener than Germany on the idea of the ECB introducing more money printing, or quantitative easing, and using the funds to buy government bonds in a bid to help stimulate flagging European economies.

Markets were also unsettled by official data showing that China's export growth slowed sharply in November, while imports surprisingly contracted, resulting in a record monthly trade surplus.

Tony Cross, market analyst at Trustnet Direct trading group, said the figures indicated that the world's second-largest economy was slowing down: "Chinese trade data fell well short of expectations and this has sent traders scurrying for the exits as the new week gets under way."

Meanwhile, figures showing that the Japanese economy contracted more than initially thought in the three months to 30 September hit the yen, sending the dollar to a seven-year high.

Gold edged up $1.25 to $1,195.25 an ounce in London.

Reuters News - ECB's loans offer clues in quantitative easing guessing game

People walk past the new ECB headquarters in Frankfurt December 4, 2014.

CREDIT: REUTERS/KAI PFAFFENBACH

(Reuters) - The guessing game over the timing of euro zonemoney printing will intensify as the European Central Bank unveils a closely watched gauge of policy in the coming week, the highlight of a calendar dominated by Europe's malaise.

On the other side of the Atlantic, investors will continue placing their bets on a different but equally crucial event: when the U.S. Federal Reserve might raise interest rates.

U.S. data and several Fed central bankers will give a sense of the speed of the recovery and when a rate rise might be merited, while oil prices and Chinese data will provide plenty more formarkets to digest.

"The key story is going to be in the euro zone," said James Knightley, ING's senior economist, referring to the results of the ECB's targeted long-term refinancing operations (TLTROs) on Thursday.

The cheap loans for banks are one of the ECB's main ways to flush money into the stagnating euro zone economy. "If the take-up is poor, that could increase market talk that the ECB is going to step in and use other tools," Knightley said.

That means a sovereign bond-buying program like those used in the United States, Britain and Japan, but which Germany fears would encourage reckless state borrowing and fuel inflation.

Such a program may come early next year. "The take-up of TLTROs could swing the ECB's Governing Council between January and March, depending on how the number looks," said Citigroup economist Guillaume Menuet.

The first TLTRO was taken up only to the tune of 83 billion euros. Hopes are higher for this time but forecasts hover around the 150 billion euro mark, leaving the ECB short of the 400 billion euros it was prepared to offer banks in total.

On Monday in Brussels, ECB President Mario Draghi will tell euro zone finance ministers no amount of stimulus can replace reforms to tax, labor and pension systems to bring down near-record unemployment.

New forecasts by the ECB predict the euro zone, which generates a fifth of global output, will grow just 1 percent in 2015 rather than the 1.6 percent predicted three months ago.

German October industrial production data and French business sentiment for November, due on Monday, are likely to show the weakness of the rebound as the bloc struggles to overcome its debt and banking crises.

Falling oil prices will also have an impact on the ECB's thinking as it deals with very low inflation. Brent crude slipped 57 cents to settle at $69.07 a barrel on Friday, averaging below $70 in the week for the first time since 2010.

Euro zone finance ministers will also try to decide on how to best help Greece in the coming weeks since a new credit line for Athens will not by ready by an original Dec. 8 deadline.

U.S. RATES, CHINESE TRADE

It's a different story in the United States, where the economy is recovering strongly. U.S. employers added the largest number of workers in nearly three years in November and wage gains picked up, which could push the Federal Reserve closer to raising interest rates.

The Fed has held overnight borrowing costs near zero since December 2008. Some see the first rate hike in September of next year but others see rates rising in July.

With a weak global economy, some investors fear that strong short-term growth may give way to a slower economic expansion from mid-year, leaving inflation below the Fed's target levels and influencing the timing of a rate hike.

Investors are waiting for the Dec. 17 Federal Open Market Committee (FOMC) meeting but will be treated to a host of data before then including November retail sales and October wholesale inventories. Fed policymaker Dennis Lockhart speaks on Monday, while producer prices for November and consumer sentiment will be published during the week.

Many expect the Fed to soon eliminate its guidance that it will keep rates near zero for a "considerable time."

"The removal of 'considerable time' at the December FOMC meeting is very likely," BNP Paribas said in a report.

Beyond Europe and the United States, Chinese data will give the latest snapshot of the slowing pace of the world's second largest economy following November's rate cut.

On Monday, China's trade balance for November will show how exports have fared after slowing foreign sales in October and could prompt policymakers to roll out more stimulus measures. Beijing will also release consumer and factory inflation data on Wednesday.

(Editing by Catherine Evans)

Reuters News - Vatican finds hundreds of millions of euros 'tucked away': cardinal

Cardinal George Pell gestures as he talks during a news conference for the presentation of new president of Vatican Bank IOR, at the Vatican July 9, 2014.

CREDIT: REUTERS/TONY GENTILE

(Reuters) - The Vatican's economy minister has said hundreds of millions of euros were found "tucked away" in accounts of various Holy See departments without having appeared in the city-state's balance sheets.

In an article for Britain's Catholic Herald Magazine to be published on Friday, Australian Cardinal George Pell wrote that the discovery meant overall Vatican finances were in better shape than previously believed.

"In fact, we have discovered that the situation is much healthier than it seemed, because some hundreds of millions of euros were tucked away in particular sectional accounts and did not appear on the balance sheet," he wrote.

"It is important to point out that the Vatican is not broke ... the Holy See is paying its way, while possessing substantial assets and investments," Pell said, according to an advance text made available on Thursday.

Pell did not suggest any wrongdoing but said Vatican departments had long had "an almost free hand" with their finances and followed "long-established patterns" in managing their affairs.

"Very few were tempted to tell the outside world what was happening, except when they needed extra help," he said, singling out the once-powerful Secretariat of State as one department that had especially jealously guarded its independence.

"It was impossible for anyone to know accurately what was going on overall," said Pell, head of the new Secretariat for the Economy that is independent of the now downgraded Secretariat of State.

AUSTRALIAN OUTSIDER

Pell is an outsider from the English-speaking world transferred by Pope Francis from Sydney to Rome to oversee the Vatican's often muddled finances after decades of control by Italians.

Pell's office sent a letter to all Vatican departments last month about changes in economic ethics and accountability.

As of Jan. 1, each department will have to enact "sound and efficient financial management policies" and prepare financial information and reports that meet international accounting standards.

Each department's financial statements will be reviewed by a major international auditing firm, the letter said.

Since the pope's election in March, 2013, the Vatican has enacted major reforms to adhere to international financial standards and prevent money laundering. It has closed many suspicious accounts at its scandal-rocked bank.

In his article, Pell said the reforms were "well under way and already past the point where the Vatican could return to the 'bad old days'."

(Reporting By Philip Pullella; Editing by Tom Heneghan)

BBC News - A million sign petition against EU-US trade talks

A campaign group website says over a million people in the European Union have signed a petition against trade negotiations with the United States.

Leaders discussed the Transatlantic Trade and Investment Partnership at the G20 meeting in Brisbane

The petition calls on the EU and its member states to stop the talks on the Transatlantic Trade and Investment Partnership or TTIP.

It also says they should not ratify a similar deal that has already been done between the EU and Canada.

It says some aspects pose a threat to democracy and the rule of law.

Dispute settlement

One of the concerns mentioned in the petition is the idea of tribunals that foreign investors would be able to use in some circumstances to sue governments.

There is a great deal of controversy over exactly what this system, known as Investor State Dispute Settlement, would enable companies to do, but campaigners see it as an opportunity for international business to get compensation for government policy changes that adversely affect them.

This kind of provision exists in many bilateral trade and investment agreements.

Friends of the Earth have published new research on the impact they have had on EU countries.

Information about these cases is not always made public, but the group says that going back to 1994, foreign investors have sought compensation of almost €30bn (£24bn) from 20 states. Where the results are known (a small minority of the total), the tribunals have awarded total compensation of €3.5bn (about £2.8bn).

Employment, environment

In Britain, the possible implications of this provision for the National Health Service have been especially controversial. Campaigners believe that the investor tribunals would make it harder to reverse any decisions to contract services out to international healthcare firms.

John Hilary of War on Want said: TTIP "will make it impossible for any future government to repeal the Health & Social Care Act and bring the NHS back into public hands".

The petition lists a number of other areas where its signatories believes European standards would suffer if the TTIP negotiations are completed and the Canada deal is ratified: employment, social, environmental, privacy and consumer protection.

The European Commission says the EU will not have to sacrifice its high standards. It also says investor protection provisions are important for investment flows and have in general worked well. But it accepts there is a need for improvement and is trying to achieve that in its bilateral negotiations.

The petition has been organised as an exercise called a European Citizens' Initiative which can lead to a public hearing in the European Parliament and require the European Commission to give a formal response explaining why it is accepting or rejecting what the petitioners call for.

The European Commission has already said that the petition doesn't qualify as such an Initiative. Campaigners have launched a legal challenge to this decision

Bloomberg News - Swiss Economy Expands More Than Forecast on Consumption

Switzerland’s economy expanded more than forecast in the third quarter, outpacing neighboringGermany thanks to consumption by households and the public sector.

Gross domestic product increased 0.6 percent in the three months through end September, after a revised 0.3 percent in the second quarter, the State Secretariat for Economic Affairs in Bern said in a statement today. That’s more than the 0.3 percent median of 17 estimates in a Bloomberg News survey.

Thanks in part to the Swiss National Bank’s currency cap, Switzerland has managed to sustain its economic growth in the face of the malaise in the euro area, the destination for about half of its exports. The European Central Bank meets tomorrow to discuss whether more needs to be done to revive the 18-nation currency bloc. That could raise pressure on the SNB’s minimum exchange rate of 1.20 per euro, set three years ago.

Today’s data is “astoundingly good,” said Roland Klaeger, economist at Raiffeisen Schweiz in Zurich. Still, “for the SNB it doesn’t really make a difference -- the ECB is really determining the tempo.”

Swiss household consumption increased 0.6 percent in the quarter, with construction investment climbing 0.8 percent and general government consumption rising 0.9 percent. Exports of goods increased by 2.8 percent, with the strongest positive contribution “by far” coming from the chemical and pharmaceutical sector.

Russia Headwinds

“Switzerland’s domestic economy continues to look good, with the jobs market very robust,” said Christian Lips, an economist at Norddeutsche Landesbank in Hanover, Germany. “Real wage growth should support private consumption.”

With political tension in Russia adding to headwinds, GDP in Germany, Switzerland’s biggest trading partner, rose just 0.1 percent in the third quarter. French output increased 0.3 percent (FRGEGDPQ), and Italy is stuck in its longest-running recession on record.

The SNB currently forecasts growth of “just below” 1.5 percent this year, cutting its prediction from 2 percent in September due to the lackluster performance of euro-area and emerging-market economies. An updated forecast is due next week when SNB officials meet in Bern for their quarterly monetary policy assessment.

While Switzerland hasn’t joined the European Union’s sanctions on Russia, imposed over the eastern European nation’s involvement in the Ukraine crisis, it has taken steps to prevent their circumvention. That includes banning some capital-market transactions and exports of goods for the oil and gas sector that could be used for military purposes.

ECB Easing

Swiss companies don’t do as much business with Russia as their German counterparts. As a destination for Swiss exports, Russia ranked behind countries including China, Japan, the U.S.,Canada, and major European nations in the first nine months of this year.

To revive growth in the euro-area, ECB policy makers are considering supplementing their negative deposit rate and asset purchases. Draghi has explicitly mentioned buying sovereign bonds, a suggestion that has met with opposition among German policy makers.

The SNB has pledged to take measures -- even a charge on sight deposits -- if needed to reinforce its ceiling on the franc, should pressure on the currency intensify.

“Even if the ECB were to engage into more aggressive quantitative easing, we do not think that the SNB would preemptively introduce a negative deposit rate on banks’ excess reserve,” Maxime Botteron, an economist at Credit Suisse Group AG, said earlier this week via e-mail. “We believe that the trigger for additional measures would be renewed substantial capital inflows, similar to those experienced in 2012.”

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net

Reuters News - Global banks return to profit, but Europe lags: study

The Canary Wharf financial district is seen in east London November 12, 2014.

CREDIT: REUTERS/SUZANNE PLUNKETT

(Reuters) - The global banking industry has moved beyond recovery and regained overall profit for the first time since the financial crisis, although European lenders are still lagging far behind rivals, an industry study showed.

"Banks in North America are again growing and showing sizable economic profit, while those in Europe show little sign of recovery," Boston Consulting Group (BCG) said in its Global Risk 2014/15 report, released on Tuesday.

Economic profit (EP) is a measure of profitability that includes refinancing, operating and risk costs against income.

Banks generated an EP of 18 billion euros ($22.5 billion) in 2013, or 3 basis points of total assets, compared with negative EP of between 6 and 23 basis points in the previous four years, BCG said. Its latest study was based on more than 300 banks, representing over 80 percent of global bank assets.

Banks in North America produced an economic profit of 25 billion euros, and profitability also improved in the Middle East and Africa. The study said banks in Asia-Pacific produced the biggest EP of 112 billion euros, near flat from 2012.

Banks in Europe delivered negative EP of 136 billion euros last year, from negative 161 billion in 2012, to take their losses since 2009 to 600 billion euros, the study said.

Eurozone banks have been slow to rebuild their capital strength and restructure against a difficult economic backdrop. Improving their profitability is their biggest challenge and they may need to sell off more loss-making units, the euro bloc's top banking supervisor said on Friday.

BGC's report said banks are entering a new era of regulation in which every region, product and legal entity will be closely regulated, reflecting regulators' intent to trigger cultural change.

"Banks should adopt a 'good citizen' approach that embraces and proactively addresses the broad intent of today's hyper-regulation."

(Reporting by Steve Slater; Editing by Mark Heinrich)