Overseas Headlines – October 8, 2018

Date: October 8, 2018 

United States:

Bullard Says U.S. Growth Depends on Productivity Picking Up

The better-than-expected growth rates in the U.S. economy are set to dissipate unless productivity picks up, Federal Reserve Bank of St. Louis President James Bullard said. “The U.S. will likely need faster productivity growth in order to maintain current real GDP growth rates,” Bullard said Monday during a talk in Singapore. “This is a possibility if U.S. investment improves and technological diffusion begins to improve business processes at a faster pace.” Bullard, who is among the Fed’s most dovish policy makers, said faster-than-expected growth over the last year-and-a-half allowed the U.S. central bank to continue raising interest rates even as inflation was lower than Fed officials expected. In mid-2017, a widely-tracked gauge of U.S. price pressures unexpectedly declined to 1.4 percent before rebounding to its 2 percent target this year. The Fed’s interest-rate setting committee voted on September 26 to raise rates for an eighth time in three years, and published projections revealing it expected gradual hikes would continue to be appropriate through 2020. Bullard is not a voting member this year, but will be in 2019. The St. Louis Fed chief said that continued rates increases weren’t necessary. “We’re good where we are,” he said after delivering the OMFIF Foundation City Lecture in Singapore. “We have a good level of rates where we are. We have inflation expectations really well centred at target. We should say from here on, we’ll react to the data. That’s the sensible way to go.” Besides, the Fed is cognizant of what’s happening in the world economy, including in emerging markets, and is on watch for those factors that will feed back to the U.S. economy, like the worsening trade conflict, he said. While the revamped North American Free Trade Agreement between the U.S., Mexico and Canada send the right kind of message on trade agreements, Bullard sees China and the U.S. digging in their heels, which makes it difficult to see an agreement. A “generalized trade war” that persists will be “very negative” for the global economy, he said.



Greek Banks Tumble as Italian Contagion Adds to Capital Concerns

Greek banks slid as contagion from Italy exacerbated concerns they’ll need to raise more capital to deal with their mountains of bad loans. The FTSE/Athex Bank Index was down 5.4 percent at 1:54 p.m. in Athens, having earlier fallen as much as 7.9 percent. Eurobank Ergasias SA tumbled as much as 14.4 percent before paring its losses to 8.9 percent, while Piraeus Bank dropped 10.8 percent, having earlier fallen 13.6 percent. Greek banks have fallen more than 40 percent this year amid doubts they can clean up their balance sheets fast enough, as supervisors pressure them to cut their bad-debt holdings. They have also been hurt by bearish market sentiment emanating from Italy, where the government is embroiled in a standoff with the European Commission over how big a budget deficit it can run. The drop on Monday was the fourth decline in the last five trading sessions. Banks rallied on Thursday after Bloomberg News reported the country is weighing a plan to let lenders unload bad loans into a special purpose vehicle, though that plan could run afoul of European Commission state-aid rules, according to Fitch Ratings. “The sector’s profitability is under pressure and progress on reducing non-performing loans has been slow,” Fitch analysts wrote in a note on Monday. “Uncertainty as to how the Greek government will support the sector and whether the solution would involve private investor losses will weigh on investor sentiment, and lead to higher external financing costs.”



China Faces a Bleaker End to 2018 as Central Bank Cuts Reserve Ratio Again

China’s central bank cut the amount of cash lenders must hold as reserves for the fourth time this year, as policy makers seek to shore up the faltering domestic economy amid a worsening trade war. The People’s Bank of China lowered the required reserve ratio for some lenders by 1 percentage point, effective from Oct. 15, according to a statement on its website Sunday. The cut will release a total of 1.2 trillion yuan ($175 billion), of which 450 billion yuan is to be used to repay existing medium-term funding facilities which are maturing, the central bank said. The central bank has shifted to looser monetary policies this year as the combined effects of Beijing’s financial clean up and the trade conflict with the U.S. threatened the economic expansion. As there’s now every sign that the Trump administration intends to continue pressing Beijing on trade and other fronts, China is faced with a more urgent need to support the domestic economy, even if that may increase downward pressure on the currency. “The move is part of policymakers’ defensive easing package, in view of headwinds on broad credit growth and more visible activity moderation in September,” economists including Robin Xing, chief China economist at Morgan Stanley in Hong Kong wrote in a note. “To keep the economy on the path of soft landing amid persistent trade tensions, we think more easing measures are needed to foster a modest rebound in credit growth.” Though further reserve-ratio cuts had been forecast by economists, Sunday’s move may offer some reprieve for equity and fixed income investors. After a week-long holiday, Chinese stocks opened down, with the CSI300 Index dropping 3 percent and the main benchmark Shanghai Composite falling 2.4 percent. The currency also dropped against the dollar, trading 0.4 percent lower after the central bank set the fixing at the weakest since May 2017.