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Highlights
HILSENRATH'S TAKE: CURRENCY MISMATCH SEEMS LIKELY TO DEEPEN AS CENTRAL BANKS DIVERGE
The Bank for International Settlements warns about global risks associated with a strengthening U.S. dollar, and Friday's U.S. jobs report suggests those risks will only intensify in the months ahead as global central bank policies diverge.
Firms overseas that have borrowed in dollars may have trouble paying the money back if the dollar keeps strengthening, the BIS argues in its quarterly report on global central banking, singling out emerging market economies. "Many firms in emerging markets have large US dollar-denominated liabilities. A continued depreciation of the domestic currency against the dollar could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions."
International bank loans to emerging markets amounted to $3.1 trillion in mid-2014, mainly in US dollars, according to the BIS. Total international debt securities issued from these economies stood at $2.6 trillion, of which three quarters was in dollars.
If there is trouble lurking here in emerging markets, it would be because they get caught up in crosscurrents created as big central bank policies diverge. The Federal Reserve is on a path to start raising short-term interest rates in mid-2015 as the U.S. job market improves. Friday's strong U.S. jobs report helped officials reaffirm this view. Meanwhile the ECB, Bank of Japan, and People's Bank of China are all moving toward easier monetary policies because of dimmer growth prospects in their economies.
The relative strength of the U.S. economy -- and the fact that other central banks will be pumping more of their currencies into the global financial system as the Fed contemplates gradually withdrawing -- points to only more dollar gains and the prospect of new bouts of financial market turbulence abroad.
HILSENRATH'S TAKE TWO: China's Big International Borrowing Draws BIS Scrutiny
The BIS quarterly review includes striking news about financial conditions in China. The world's second largest economy is typically seen as a global financial powerhouse, thanks to nearly $4 trillion in foreign exchange reserves, many of them held in U.S. dollars.
But China's collective balance sheet is more complex than that. Claudio Borio, the head of the BIS's Monetary and Economics Department, singles out China as an especially conspicuous international borrower.
"The post-crisis surge in cross-border bank lending to China has been extraordinary. Since end-2012, the amount outstanding, mostly loans, has more than doubled, to $1.1 trillion at end-June this year, making China the seventh largest borrower worldwide," Mr. Borio said in a statement with the review.
The report details a surge of lending into China in the past year. "Cross-border claims on the country increased by $65 billion during Q2 2014 and were up by 47% in the year to end-June 2014," the BIS said. "Owing to such rapid growth, China has become by far the largest EME borrower for BIS reporting banks." One factor behind the surge was apparently lending between mainland and overseas offices of Chinese banks. After excluding inter-office transactions, the exposure of foreign banks to China was still almost twice as large as that to any other emerging market economy, the BIS said.
It is important to look for fault-lines in the financial system of the world's second largest economy as growth slows. Perhaps this is one.
-By Jon Hilsenrath
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
Hilsenrath Analysis: Friday's Jobs Report Assures Global Central Banks Going in Two Directions. Friday's U.S. jobs report assures the world's major central banks will be going in opposite directions in the months ahead. Strong job growth in the U.S. keeps the Federal Reserve on a path toward raising short-term interest rates in 2015, while the European Central Bank, the People's Bank of China and the Bank of Japan debate whether new easy money measures are warranted in the face of disappointing economic output and downward pressure on inflation.
Cleveland Fed's Mester Says the Economy is Coming Back. Friday's jobs report shows the economy is recovering and moves the Fed closer to its goal of reducing unemployment, Federal Reserve Bank of Cleveland President Loretta Mester said. "It's a strong report" that continues a broader positive economic trend, said Ms. Mester, who has a vote on the Fed committee setting interest-rate policy, at a conference in Washington, D.C. "My own personal view right now is the economy is coming back."
Fed Needs to Acknowledge Rate Hikes Are Coming: Mester - Reuters. The Fed needs to adjust its policy statement to acknowledge clear signs of economic strength and, in particular, stop telling the world that interest rates won't rise for a long while yet, a top Fed official said in an interview on Friday. Cleveland Fed President Loretta Mester told Reuters she is more optimistic about the economy than most of her colleagues at the U.S. central bank, and would probably be willing to tighten monetary policy sooner.
Falling Oil Prices Spur New Bets on Global Economic Growth. Many of the world's top policy makers are rewriting their economic forecasts for the U.S., Europe, Japan and elsewhere, betting plummeting oil prices will lead to an overall boost in the global economy by delivering a windfall to consumers and manufacturers.
Bank for International Settlements Sounds Alarm Over Dollar -- FT. Global financial policy makers have sounded the alarm about the impact of a resurgent U.S. dollar on emerging markets, where companies have racked up large debts denominated in the American currency. The Bank for International Settlements, known as the central bankers' bank, warned on Sunday in its Quarterly Review that a prolonged rally in the dollar could expose financial vulnerabilities in emerging markets by damaging some companies' creditworthiness.
More from BIS: Future bouts of financial disruption may not follow the same pattern as prior crises, cautioned Hyun Song Shin, Economic Adviser and Head of Research of the Bank for International Settlements, in a presentation delivered to the Hutchins Center on Fiscal and Monetary Policy.
ECB's Nowotny Warns on Falling Inflation, Growth. A top European Central Bank official warned on Monday that inflation will likely to continue to fall in the eurozone in the first quarter of next year amid a prolonged slowdown in economic growth in the single currency area.
OECD Leading Indicators Flash Warning on Eurozone. Economic growth is set to slow in the eurozone, according to leading indicators released Monday by the Organization for Economic Cooperation and Development, placing the currency area at risk of a slide back into contraction.
Low Oil Prices 'Just Going to Reinforce Deflation Fears,' said ECB Coene. Low oil prices aren't unconditionally positive in the current atmosphere of low inflation, Luc Coene, Belgium's central bank governor and a member of the European Central Bank governing council, said Friday. While lower oil prices are good news for businesses and individuals, "what makes it a bit more complicated this time round is that we already have an environment of very low inflation and the lower oil prices are just going to reinforce deflation fears," he told reporters. "That could partly neutralize the positive effects."
Japan GDP Worse Than Initially Reported. Japan's economy shrank more than previously estimated in the third quarter, contracting 1.9% as capital spending declined and private consumption remained weak, the government said Monday.
China's Banks Press PBOC to Cut Reserve-Requirement Ratio. China's big banks are pressing the central bank to let them lend out more of their deposits, according to people familiar with the talks.
Bank of England Reckons Rate Rises Won't Crimp Growth. A critical question for central banks contemplating a rise in interest rates is what effect that might have on consumer spending and the wider economy. A new study published by the Bank of England Monday suggests that a gradual rise in borrowing costs shouldn't have too big an impact on the U.K. recovery, provided the nation's recent growth fuels a long-awaited rise in incomes.
U.K.'s Huge Banking Sector Likely to Get Bigger. The U.K. has one of the largest banking sectors relative to national income of any country in the world, and it is only going to get bigger, research by the Bank of England showed Monday.
Bank of Mexico Leaves Interest Rates Unchanged. The Bank of Mexico left its key overnight lending rate target unchanged at 3% Friday in its last scheduled monetary-policy decision of the year, saying that risks for both inflation and economic growth have increased since its meeting in October.
Bank of Israel Chief: Price Controls Won't Help High Living Costs. Israeli central bank Gov. Karnit Flug on Sunday called for increased competition and productivity to address high living costs, adding that increased price controls would only exacerbate corruption. --Dow Jones Newswires
Chile Central Bank Pres: Peso Depreciation an 'Optimal Response.' Chile's central bank President Rodrigo Vergara said the country's depreciating peso has acted as a shock absorber while the central bank has been easing monetary policy.--Dow Jones Newswires
(MORE TO FOLLOW) Dow Jones Newswires
December 08, 2014 07:04 ET (12:04 GMT)
Ukraine's Foreign-Currency Reserves Dip Below $10 Billion. Ukraine's central bank reported foreign-currency reserves at their lowest for almost a decade, underscoring the country's precarious financial state as the Group of Seven considers a new multibillion-dollar rescue package.
Sri Lanka Looks to Chinese Offshore Bond Market. Sri Lanka may become the next country to take advantage of the burgeoning Chinese offshore bond market. "We are considering the tapping of the renminbi bond market and have obtained some preliminary advice on this matter from investment banks," Ajith Cabraal Governor of the Central Bank of Sri Lanka told The Wall Street Journal.
GRAPHIC CONTENT
In Ranking U.S. Presidents by Job Creation, Obama Still Lags. President Barack Obama welcomed Friday's jobs report, noting that the economy has now created 10.9 million jobs over the past 57 months. This streak of growth is improving the net job creation over which Mr. Obama has presided, though among the last 10 presidents, Mr. Obama still ranks sixth in terms of job creation.
FORWARD GUIDANCE
Monday, Dec. 8
- ECB's Nowotny speaks in Frankfurt at 0800 GMT
- Atlanta Fed President Dennis Lockhart speaks about his economic outlook and monetary policy at 12:30 p.m. EST
- BOE's Martin Weale speaks at the University of London at 1830 GMT
Tuesday, Dec. 9
- ECB's Makuch gives press conference at 1300 GMT
- ECB's Nowotny speaks in Vienna 1500 GMT
- ECB's Praet speaks in Washington, DC at noon EST
Wednesday, Dec. 10
- BOE's Ian McCafferty speaks in Liverpool at 0800 GMT
- ECB's Linde speaks in Madrid at 0830 GMT
- ECB's Hansson to speak in Estonia at 0900 GMT
- ECB's Coeure speaks in Brussels at 1500 GMT
- National Bank of Hungary releases minutes from its Nov. 25 meeting at 1300 GMT
Thursday, Dec. 11
- ECB Monthly Bulletin released at 0900 GMT
- ECB's Liikanen speaks in Helsinki at 0900 GMT
- Bank of Russia releases a policy statement at 0930 GMT
- Bangko Sentral ng Pilipinas (Philippines) releases a policy statement
- Bank Indonesia releases a policy statement
- Bank of Korea releases a policy statement
- Norges Bank releases a policy statement and rate decision
- Reserve Bank of New Zealand releases a policy statement and monetary policy report
- Swiss National Bank releases a policy statement at 09:30 local time
COMMENTARY
The November jobs report was strong enough that the market needs to seriously start thinking about when the Federal Reserve will start hiking interests, David Lebovitz, a market analyst at JP Morgan Asset Management, said on the Journal's MoneyBeat show. "The risk is that the Fed does something sooner than a lot of people are expecting," he said.
" Congress has burdened the Federal Reserve with too many responsibilities: monetary and regulatory powers that pull it in different directions," writes former Dallas Fed Vice President Gerald O'Driscoll Jr. in a letter to the Journal's editors.
The ECB's monetary policy stance is much less accommodative than those of the Federal Reserve and the Bank of England, writes Zsolt Darvas of the Bruegel think tank. Using estimated shadow interest rates that are a more accurate measure of the overall stance of monetary policy, incorporating "unconventional measures" such as quantitative easing, Mr. Darvas estimates that while the ECB rate is now below zero, it is still well above the minus 3% rates for the U.S. and the U.K..
BASIS POINTS
- South Africa's rand dropped to a six-year low on Monday after government data showed that weak oil prices haven't helped the energy-importing nation narrow its wide current-account deficit as much as economists had hoped.
- The U.S. trade gap narrowed slightly in October but an increase in exports didn't erase the prior month's decline, suggesting trade will be a drag on economic growth as the year ends.
-U.S. Consumers' Borrowing Slowed in October. Americans' debt outside of real-estate loans expanded at a 4.9% seasonally adjusted annual rate to $3.279 trillion in October, the Federal Reserve said Friday. That was the smallest monthly increase since November 2013.
- Germany's industrial output expanded less than expected in October, raising concerns about the strength of fourth-quarter economic growth in Europe's largest economy.
- Chinese export growth fell below expectations in November amid tepid global demand, providing the latest snapshot of weakness in the world's second-largest economy, as weak imports pushed the nation's monthly trade surplus to a record.
- Canada unexpectedly shed jobs in November for the first time in three months as thousands of jobs evaporated in the private sector, lending more weight to expectations the Bank of Canada will not raise interest rates anytime soon.
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(END) Dow Jones Newswires
December 08, 2014 07:04 ET (12:04 GMT)
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