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A one-two punch for the US economy – CNN

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A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

London (CNN Business)The outlook for the American economy is suddenly much darker.

Investors around the world sold stocks and oil prices dropped sharply on Monday as Omicron cases surged and governments imposed anti-virus measures that could hamper economic growth.
But the US faces a second potential blow after Sen. Joe Manchin, a Democrat, said on Sunday that he will not vote for President Joe Biden’s economic and climate plan.
Dow futures fell 370 points — or more than 1% — by 6:45 a.m. ET on Monday, while benchmark Brent crude was down about 3% at $71 a barrel. Major stock market indexes in Europe and Asia fell by around 2%.
“Global markets are pricing in … greater growth concerns on the back of the weekend’s Omicron-related news. Dimmed prospects for the US fiscal package may also be playing a role,” Mohamed El-Erian, chief economic adviser at Allianz, said Monday on Twitter.
For an Omicron preview, look to Europe: The Netherlands is under a strict lockdown. In the United Kingdom, the government has asked people to work from home and it has not ruled out further restrictions before Christmas. Germany, Denmark and Ireland are also taking steps to stem the variant.
“Even if booster shots are effective at reducing the medical risks, a rapid spread of Omicron could still overburden health systems and force countries to follow the Netherlands and adopt more economically damaging restrictions,” said Berenberg chief economist Holger Schmieding.
If that were to happen, the eurozone and the United Kingdom could both see their economies shrink by 1% in the first quarter of 2022, compared with the final three months of this year, he added. Germany, the region’s biggest economy, is already teetering on the brink of recession.
The United States may only be a few days or weeks behind Europe. “It’s going to take over,” Anthony Fauci, the nation’s top infectious disease expert, said of Omicron on CNN’s “State of the Union.”
The fast-spreading variant threatens to add pressure to already stretched supply chains and exacerbate inflation. If US consumers cut back on shopping, dining out and travel, that could also hurt the economy.
Biden has been pushing a $1.75 trillion bill that includes initiatives like universal pre-K for 3- and 4-year olds, child care assistance and child tax credits, and a federally funded paid family and sick leave program.
To get the Build Back Better Act through Congress, Biden needs Manchin’s vote. But the West Virginian has balked at the legislation’s price tag, and expressed concerns that it may add fuel to already soaring inflation.
Still, most analysts expected Manchin to eventually support the bill. That now appears to be a miscalculation.
Goldman Sachs told clients Sunday it no longer assumes the legislation will get through Congress after Manchin announced that he’s a “no.”
“A failure to pass BBB has negative growth implications,” Goldman Sachs economists, led by Jan Hatzius, said in the research report.
Citing the “apparent demise” of Build Back Better, the Wall Street bank now expects GDP to grow at an annualized pace of 2% in the first quarter, down from 3% previously.
Goldman Sachs also trimmed its GDP forecasts for the second quarter to 3% from 3.5% and the third quarter to 2.75% from 3%. It pointed to the expiration of the child tax credit and the lack of spending in other areas that had been anticipated.
For investors, the wave of bad news could mean a rough end to 2021.
“It’s a lot more like Halloween than Christmas,” Societe Generale analyst Kit Juckes wrote in a research note Monday.

The world’s second biggest economy is cutting rates

China’s central bank cut its main interest rate for the first time in 20 months, as authorities step up efforts to boost an economy that has been hit by pandemic-related curbs, a real estate slump and an unprecedented crackdown on private enterprise.
The People’s Bank of China on Monday lowered its one-year loan prime rate (LPR) by 5 basis points to 3.8%, reports my CNN Business colleague Laura He. The LPR is the rate at which commercial banks lend to their best customers and it serves as the benchmark rate for other loans.
While Monday’s rate cut is small, it’s the first such move since April 2020, when China slashed the LPR to boost its Covid-hit economy, which had just contracted for the first time in more than 40 years.
“The cut reinforces our view that authorities are increasingly open to cutting interest rates amid looming economic headwinds,” said Zhaopeng Xing, senior China strategist at ANZ, in a research note on Monday.
A cut to the lending rate can help reduce borrowing costs for households and firms and in turn encourage consumer spending and investment.
Unlike the West, Beijing had refrained from flooding the economy with stimulus packages during the pandemic, focusing instead on offering targeted support to smaller businesses.
China was the only major economy to record growth in 2020, but this year the country’s expansion has been hit by several factors, forcing it to consider ways to provide support even as other major central banks withdraw stimulus and raise interest rates to fight inflation.
Flashback: Last week, the Bank of England became the first major central bank to raise interest rates since the start of the pandemic. The US Federal Reserve could follow with three rate hikes next year.

Spider-Man could be the biggest box office hero of the year

There is a small glimmer of hope for movie theaters.
“Spider-Man: No Way Home,” the latest Spider-Man adventure from Sony and Marvel, opened over the weekend, and is set to become the biggest opening of the year by a large margin, reports my CNN Business colleague Frank Pallotta.
It’s projected for a $130 million opening weekend in North America, according to industry expectations. The movie brought in $50 million on Thursday night — that’s the third biggest Thursday opening ever.
It’s a remarkable milestone in a pandemic, and it signals “No Way Home” will likely become the only film of the Covid era to open to a more-than-$100-million opening weekend. That number may be even severely low-balling the film’s totals, according to some analysts.
AMC Theatres’ stock soared 20% following the news of Thursday’s stellar preview. But with Omicron cases on the rise, the relief may be short lived.
“It means everything to theaters right now,” Shawn Robbins, chief analyst at Boxoffice.com, told CNN Business. “We’ve consistently pointed to how important each big movie has been for cinemas and studios throughout the pandemic this year, but ‘No Way Home’ is the most significant from a box office perspective so far.”

Up next

Nike and Micron report earnings after the closing bell.
Coming tomorrow: Earnings from General Mills, Rite Aid and BlackBerry. 

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Ahead of election, Macron banks on rosy French economy, new jobs – Financial Post

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Article content

PARIS — President Emmanuel Macron will on Monday tout 21 new foreign investment projects in France and a booming economy as proof his economic reforms have been bearing fruit less than three months before a presidential election in which he is expected to run.

During a visit to Alsace in the east, Macron will announce a 300-million-euro ($342 million) industrial project by German chemical giant BASF, one of 21 new projects worth 4 billion euros and 10,000 jobs as part of a drive to attract foreign investors, his office said.

Article content

As the presidential race heats up, his aides are keen to shift the debate away from immigration and law-and-order issues and put the spotlight on the economy, which has been recovering strongly from the COVID-19 pandemic.

“This is the result of all the reforms that were carried out since the start of the mandate,” a presidential aide told reporters.

“Three months before an election, we could have expected investors to be in wait-and-see mode because of the uncertainty of an election. Instead, we see very strong confidence from foreign investors in the president’s economic policy,” he said.

Since 2017, Macron has pushed through a cocktail of supply-side economic reforms meant to boost businesses’ competitiveness, cut taxes on investors and loosen strict labor market rules.

Article content

Critics say he has acted as “president of the rich” who wants to do away with France’s cherished social safety nets and has cut welfare benefits for some of the poorest.

But three months ahead of the April election, indicators show the French economy is booming, with growth expected to have hit 6.7% in 2021 and France having returned closer to pre-pandemic levels than any G7 peer bar the United States.

Macron supporters also received an unexpected boost from economist Paul Krugman on Friday.

“In fact, among major advanced economies, the star performer of the pandemic era, arguably, is … France,” he wrote in his New York Times column https://www.nytimes.com/2022/01/14/opinion/france-economy-pandemic-socialism.html. ($1 = 0.8761 euros) (Reporting by Michel Rose; Editing by Emelia Sithole-Matarise)

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Dollar finds a footing as traders brace for hawkish Fed

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The dollar clung to a late week bounce on Monday as investors braced for January’s U.S. Federal Reserve meeting and raised bets it will chart a year ahead holding several rate hikes, while China surprised analysts with a benchmark cut.

Chinese economic growth data, due later on Monday (0200 GMT), a Bank of Japan policy meeting which concludes on Tuesday, British inflation data on Wednesday and Australian jobs figures on Thursday are also in view as traders gauge the global policy outlook.

The dollar was 0.2% higher at 114.45 yen early in the Asia session, about 0.8% above a Friday low. It also edged about 0.1% firmer on the euro to $1.1403.

The moves follow the dollar’s jump on Friday along with U.S. yields and underscore support for the greenback from the hawkish rates outlook, even if momentum for gains has started to wane.

The U.S. dollar index, which declined sharply last week until Friday’s leap, sat at 95.225 in Asia on Monday.

“Friday’s move suggest to me that the interest rate driver for dollar strength is not dead and buried,” said National Australia Bank’s head of foreign exchange strategy Ray Attrill.

He said it may not necessarily return to drive new dollar highs, but added: “We’ve had a hawkish twist out of every Fed meeting since June last year.”

The Fed meets Jan. 25-26 and is not expected to move rates, but there is a growing drumbeat of hawkish comments coming from within and outside the central bank.

Last week, J.P. Morgan CEO Jamie Dimon remarked that there could be “six or seven” hikes this year and billionaire hedge fund manager Bill Ackman floated on Twitter over the weekend the possibility of an initial 50 basis point hike to tame inflation.

The cash Treasury market was closed for a holiday on Monday but 10-year futures were sold to a two-year low and Fed funds futures also fell, reflecting a strengthening conviction in the market of at least four hikes in 2022.

The Australian and New Zealand dollars, which dropped sharply on Friday, remained under pressure on Monday. The Aussie was last down 0.2% at $0.7200, ending for now a brief foray above resistance around $0.7276. [AUD/]

The kiwi edged 0.2% lower to $0.6791.

In China, bonds rallied and the yuan slipped after the central bank cut borrowing costs for medium-term loans for the first time since April 2020, defying market expectations.

Ten-year government bond futures rose to their highest since June 2020 after the move and the yuan began onshore trade marginally softer at 6.3555 per dollar.

Chinese gross domestic product figures due at 0200 GMT are expected to show annual growth at its slowest in 18 months as a property downturn drags on demand.

Elsewhere a month-long rally for sterling has petered out around its 200-day moving average. It held at $1.3669 on Monday, but analysts say it could resume gains if inflation data makes the case for higher interest rates.

“Interest rate markets are currently pricing an 80% + chance of a 25 bp rate hike by the Bank of England on 3 February,” said Commonwealth Bank of Australia strategist Joe Capurso.

“A quicker pace of inflation could see pricing move closer to 100%.”

========================================================

Currency bid prices at 0139 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.1402 $1.1417 -0.13% +0.29% +1.1425 +1.1401

 

Dollar/Yen

114.4500 114.2250 +0.20% -0.50% +114.5050 +114.2800

 

Euro/Yen

130.51 130.36 +0.12% +0.15% +130.5500 +130.3200

 

Dollar/Swiss

0.9156 0.9140 +0.17% +0.37% +0.9158 +0.9143

 

Sterling/Dollar

1.3665 1.3685 -0.14% +1.05% +1.3675 +1.3665

 

Dollar/Canadian

1.2549 1.2557 -0.06% -0.74% +1.2555 +1.2539

 

Aussie/Dollar

0.7200 0.7218 -0.24% -0.95% +0.7224 +0.7199

 

NZ

Dollar/Dollar 0.6790 0.6810 -0.28% -0.78% +0.6820 +0.6791

 

 

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ

 

(Reporting by Tom Westbrook; Editing by Jacqueline Wong)

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China’s Economy Slowed Late Last Year on Real Estate Troubles – The New York Times

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Economic output climbed 4 percent in the last quarter of 2021, slowing from the previous period that ran July through September. Growth has faltered lately as home buyers and consumers become cautious.

BEIJING — Construction and property sales have slumped. Small businesses have shut because of rising costs and weak sales. Debt-laden local governments are cutting the pay of civil servants.

China’s economy slowed markedly in the final months of last year as government measures to limit real estate speculation hurt other sectors as well. Lockdowns and travel restrictions to contain the coronavirus also dented consumer spending. Stringent regulations on everything from internet businesses to after-school tutoring companies have set off a wave of layoffs.

China’s National Bureau of Statistics said Monday that economic output from October through December was only 4 percent higher than during the same period a year earlier. That represented a further deceleration from the 4.9 percent growth in the third quarter, July through September.

The world’s demand for consumer electronics, furniture and other home comforts during the pandemic has kept exports strong, preventing China’s growth from stalling. Over all of last year, China’s economic output was 8.1 percent higher than in 2020, the government said. But much of the growth was in the first half of last year.

CHINATOPIX, via Associated Press

The snapshot of China’s economy, the main locomotive of global growth in the last few years, adds to expectations that the broader world economic outlook is beginning to dim. Making matters worse, the Omicron variant of the coronavirus is now starting to spread in China, leading to more restrictions around the country and raising fears of renewed disruption of supply chains.

The slowing economy poses a dilemma for China’s leaders. The measures they have imposed to address income inequality and rein in companies are part of a long-term plan to protect the economy and national security. But officials are wary of causing short-term economic instability, particularly in a year of unusual political importance.

Next month, China hosts the Winter Olympics in Beijing, which will focus an international spotlight on the country’s performance. In the fall, Xi Jinping, China’s leader, is expected to claim a third five-year term at a Communist Party congress.

With growth in his country slowing, demand slackening and debt still at near-record levels, Mr. Xi could face some of the biggest economic challenges since Deng Xiaoping began lifting the country out of its Maoist straitjacket four decades ago.

“I’m afraid that the operation and development of China’s economy in the next several years may be relatively difficult,” Li Daokui, a prominent economist and Chinese government adviser, said in a speech late last month. “Looking at the five years as a whole, it may be the most difficult period since our reform and opening up 40 years ago.”

China also faces the problem of rapid aging that could create an even greater burden on China’s economy and its labor force. The National Bureau of Statistics also said that China’s birthrate fell sharply last year and is now barely higher than the death rate.

As costs for many raw materials have risen and the pandemic has prompted some consumers to stay home, millions of private businesses have crumbled, most of them small and family owned.

That is a big concern because private companies are the backbone of the Chinese economy, accounting for three-fifths of output and four-fifths of urban employment.

Kang Shiqing invested much of his savings nearly three years ago to open a women’s clothing store in Nanping, a river town in southeastern China’s Fujian Province. But when the pandemic hit a year later, the number of customers dropped drastically and never recovered.

As in many countries, there has been a broad shift in China toward online shopping, which can undercut stores by using less labor and operating from inexpensive warehouses. Mr. Kang was stuck paying high rent for his store despite the pandemic. He finally closed it in June.

“We can hardly survive,” he said.

Another persistent difficulty for small businesses in China is the high cost of borrowing, often at double-digit interest rates from private lenders.

Chinese leaders are aware of the challenges private companies face. The central bank is taking steps to encourage the country’s state-controlled commercial banks to lend more money to small businesses. Premier Li Keqiang has promised further cuts in taxes and fees to help the country’s many struggling small businesses.

On Monday, China’s central bank made a small move to reduce interest rates, which could help reduce slightly the interest costs of the country’s heavily indebted real estate developers. The central bank pushed down by a tenth of a percentage point its interest rate benchmark for some one-year loans, to 2.85 percent.

The building and fitting out of new homes has represented a quarter of China’s economy. Heavy lending and widespread speculation have helped China erect the equivalent of 140 square feet of new housing for every urban resident in the past two decades.

This autumn, the sector faltered. The government wants to limit speculation and deflate a bubble that had made new homes unaffordable for young families.

China Evergrande Group is only the largest and most visible of a lengthening list of real estate developers in China that have run into severe financial difficulty lately. Kaisa Group, China Aoyuan Property Group and Fantasia are among other developers that have struggled to make payments as bond investors become more wary of lending money to China’s real estate sector.

Gilles Sabrié for The New York Times

As real estate companies try to conserve cash, they are starting fewer construction projects. And that has been a big problem for the economy. The price of steel reinforcing bars for the concrete in apartment towers, for example, dropped by a quarter in October and November before stabilizing at a much lower level in December.

The decline in home prices in smaller cities has hurt the value of people’s assets, which in turn made them less willing to spend. Even in Shanghai and Beijing, apartment prices are no longer surging.

There have been faint hints of renewed government support for the real estate sector in recent weeks, but no sign of a return to lavish lending by state-controlled banks.

The financial distress of Evergrande “is a signal that money will be pushed from real estate to the stock market,” said Hu Jinghui, an economist who is the former chairman of the China Alliance of Real Estate Agencies, a national trade group. “The policies can be loosened, but there can be no return to the past.”

The slowdown in the housing market has also hurt local governments, which rely on land sales as a key source of revenue.

The International Monetary Fund estimates that government land sales each year have been raising money equal to 7 percent of the country’s annual economic output. But in recent months, developers have curtailed land purchases.

Starved of revenue, some local governments have halted hiring and cut bonuses and benefits for civil servants, prompting widespread complaints on social media.

In Hangzhou, the capital of Zhejiang Province, a civil servant’s complaint of a 25 percent cut in her pay spread quickly on the internet. The municipal government did not respond to a fax requesting comment. In northern Heilongjiang Province, the city of Hegang announced that it would not hire any more “low-level” workers. City officials deleted the announcement from the government’s website after it drew public attention.

Some governments have also raised fees on businesses to try to make up for the shortfall.

Bazhou, a city in Hebei Province, collected 11 times as much money in fines on small businesses from October through December as it did in the first nine months of last year. Beijing criticized the city for undermining a national effort to reduce the cost of doing business.

Exports are setting records. Families around the world have responded to being stuck at home during the pandemic by spending less on services and more on consumer goods now made mainly in Chinese factories.

Some areas of consumer spending have been fairly robust, notably the luxury sector, with sports cars and jewelry selling well.

CHINATOPIX, via Associated Press

Few anticipate that the government will allow a severe economic downturn this year, ahead of the Communist Party congress. Economists expect the government to soften its restrictions on lending and step up government spending.

“The first half of the year will be challenging,” said Zhu Ning, deputy dean of the Shanghai Advanced Institute of Finance. “But then the second half will see a rebound.”

Li You contributed research.

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