By Yoruk Bahceli

(Reuters) - A big selloff that pushed U.S. borrowing costs to 15-year highs left euro zone bonds relatively unscathed in August, reflecting investor bets the bloc's economic growth and funding needs will increasingly lag those in the United States.

A resilient U.S. economy and rising borrowing needs pushed Treasury yields to their highest in over 15 years in August amid growing expectations that interest rates would stay higher for longer. Furthermore, U.S. inflation-adjusted borrowing costs rose above 2% for the first time since 2009, hurting stocks and pushing up borrowing costs globally.

European bonds, however, were less affected and it is not hard to see why.

While the U.S. economy, which grew 2.4% last quarter, has delivered a string of positive surprises, sharp contractions in business activity last week pointed to deepening economic pain in Europe.

"In the U.S., we went from expectation of a recession at the end of the year to recent solid economic data," said Mauro Valle, head of fixed income at Generali (BIT:GASI) Investment Partners.

"In Europe, we went from a positive economic trend a couple of months ago to more negative data," Valle said.

Bond markets reflect the two regions' diverging economic fortunes and rate expectations.

Benchmark 10-year Treasury yields, though down from their highs at month-end, were still set to end August with a rise of 17 basis points, while 10-year yields have risen just 4 basis points in Germany, the euro zone's benchmark, and by 11 bps in Britain.

Last week, U.S. 10-year Treasury yields touched their highest relative to Germany's since December.

For rate-sensitive short-dated German bond yields yields are even down 17 bps in August as weak data has raised expectations of a European Central Bank rate hike pause in September. In contrast, equivalent U.S. yields are flat for the month.

"This is not a global selloff. It's a U.S.-centric selloff," said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, which manages $745 billion in assets. He said there was more focus now on individual economies and, for example, his firm favoured British government bonds.

DEFICIT WATCH

Crucially, borrowing needs are also diverging across the Atlantic, with U.S. fiscal outlook deteriorating and euro zone's improving.

    "Europe is not paying lip service to fiscal consolidation, it is doing fiscal consolidation," said Barclays's head of euro rates strategy Rohan Khanna.

Fitch Ratings, which stripped the U.S. of its prized AAA credit rating in early August citing fiscal pressures, expects the U.S. government deficit to rise to 6.3% of gross domestic product this year, and 6.6% next year, from 3.7% in 2022, and widen further thereafter.

In Germany, Fitch forecasts the deficit will rise to 3.1% of GDP this year from 2.6% last year, but narrow to around 1% in the longer term. Similarly it expects deficits to narrow in highly-indebted Italy and in France.

Mondher Bettaieb-Loriet, a fund manager at Vontel Asset Management, said lower debt issuance in Europe compared with the United States, would favour European government bonds over Treasuries.

Bigger fiscal deficits lead to more borrowing, resulting in higher interest rates and lower bond prices.

SPILLOVER

BofA, Goldman Sachs and Barclays expect Treasury yields to end the year slightly below current levels. Yet last week's Jackson Hole central banking symposium signalled growing concern that a strong U.S. economy could force the Federal Reserve to raise rates further than markets now expect, which would drive up borrowing costs elsewhere.

Barclays's Khanna estimates German bond yields would have been 50-60 bps lower had they only been driven by domestic factors.

For now, such effect should be welcome by the ECB, helping it fight inflation by tightening monetary conditions, said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

The spillover from higher Treasury yields is more challenging elsewhere.

In Japan, rising U.S. yields have pushed the yen to its lowest in almost 10 months and Japanese bond yields touched 10-year highs, triggering a recent Bank of Japan intervention.

"The higher U.S. yields push the yen weaker, which makes it difficult for the BOJ to contain yields through bond buying," said Ataru Okumura, senior rates strategist at SMBC Nikko Securities.

By Ankur Banerjee

SINGAPORE (Reuters) - Asian equities rose on Wednesday and the dollar wobbled as weak U.S. labour data bolstered bets that the Federal Reserve was likely done with its interest rate hikes, while beaten-down China stocks rose for a third straight day.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.86% to a two-week top and is on a three-day winning streak. The index though is down 6% in August and set for its worst monthly performance since February.

Japan's Nikkei was up 0.5%, while the Australia's S&P/ASX 200 index rose 0.64%.

China shares have gained this week following the announcement of measures to lift investor confidence, including halving the stock trading stamp duty, loosening margin loan rules, and putting the brakes on new listings.

In early trading, the blue-chip CSI 300 Index was 0.3% higher, while Hong Kong's Hang Seng Index rose 0.75%.

Analysts though see a need for more action from Chinese authorities to sustain the rally. "It will take more resolute policy measures and a sustainable recovery in earnings in order for the rally to last," Carlos Casanova, senior economist for Asia at UBP, said.  

Investors' focus will be on PMI data from China later this week that will highlight the state of the economy.

Overnight, Wall Street ended sharply higher, while Treasury yields slid to three-week lows after data showed U.S. job openings dropped to the lowest level in nearly 2-1/2 years in July, signalling easing labour market pressures. [.N]

"'Bad news is good news,' as the data supported bets for a sooner end of the Fed's hiking cycle despite the recent hawkish rhetoric of Fed Chair Powell," Tina Teng, markets analyst at CMC Markets (LON:CMCX), said in a note.

With the Fed highlighting that the interest rate path will be heavily dependent on data, traders are tweaking their bets based on the latest indicators.

Markets are pricing in an 89% chance of the Fed standing pat at its meeting next month, the CME FedWatch tool showed, and are now pricing in a 50% chance of another pause at the November meeting compared with a 38% chance a day earlier.

A much clearer economic picture will likely be revealed later in the week when U.S. payrolls and personal consumption expenditure reports are due.

U.S. Treasury yields were stable in Asian hours. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 1.3 basis points at 4.903%, easing away from the three week low of 4.871% it touched on Tuesday. [US/]

The drop in yields put pressure on a buoyant dollar. [FRX/] Against a basket of currencies, the dollar inched up 0.029% to 103.58 after slipping nearly 0.4% on Tuesday.

The yen weakened 0.15% to 146.09 per dollar and remained at levels that led to intervention in the currency market last year by Japanese authorities.

The Australian dollar fell 0.32% to $0.646 after data showed Australian consumer price inflation slowed to a 17-month low in July, signalling that interest rates might not have to rise again.

U.S. crude rose 0.32% to $81.42 per barrel and Brent was at $85.69, up 0.23%. Both benchmarks rallied more than a dollar a barrel on Tuesday on a soft dollar. [O/R]

Traders will be closely watching cocoa prices on Wednesday after the London cocoa futures on ICE rose to a 46-year high on Tuesday, buoyed by tightening supplies.

Top cryptocurrency bitcoin eased a bit in early Asian hours to trade at $27,554 after rising 7% on Tuesday. A federal appeals court ruled on Tuesday that the U.S. securities regulator was wrong to reject an application from Grayscale Investments to create a spot bitcoin exchange-traded fund.

NEW YORK/LONDON (Reuters) - Bitcoin rose to two-week highs on Tuesday after a U.S. court ruled that the Securities and Exchange Commission (SEC) should not have rejected digital asset manager Grayscale's application for a spot bitcoin exchange traded fund.

It was last up nearly 7% at $27,910

The SEC's denial of Grayscale's proposal was arbitrary and capricious because the regulator failed to explain the different treatment between bitcoin futures ETFs and spot bitcoin ETFs, said a panel of judges in the District of Columbia Court of Appeals in Washington.

"Despite the inevitable SEC appeal, to our mind there is no doubt now, spot BTC ETFs are coming to the US. We don't believe the SEC will act as kingmaker and the most likely outcome is a block approval of applications that meet requirements, probably in Q1 2024," said Tim Bevan, chief executive officer at ETC Group, crypto exchange-traded product provider.

He also expects pent up U.S. demand to positively impact bitcoin prices and help global acknowledgement of crypto as a new asset class.

The regulator did not immediately respond to requests for comment on Tuesday.

Both parties have 45 days to appeal the ruling, in which case it would either go to the U.S. Supreme Court or an en banc panel review. It is unclear if the SEC will appeal.

The SEC last year rejected Grayscale's application for a spot bitcoin ETF, arguing the proposal did not meet anti-fraud and investor protection standards. It cited the same reason in denying dozens of other applications for similar products, including those from Fidelity and VanEck.

Ether, the second largest cryptocurrency in terms of market capitalization, was also up, rising about 5% to $1,730.50.. Earlier, it hit a two-week peak as well of $1,735.60.

Bitcoin and ether have been in a recent slump, caught up in a broad risk-off move due in part to expectations that the Federal Reserve will keep interest rates higher for longer amid persistently elevated inflation.

So far this month and despite Tuesday's sharp gains, both bitcoin and ether were down 6% and nearly 8%, respectively.

By David Milliken

LONDON (Reuters) - The number of house purchases in Britain this year is on course to drop by 21% to its lowest since 2012 as a result of rising borrowing costs, property website Zoopla forecast on Wednesday.

Zoopla forecast there would be 1.0 million residential housing sales this year, down from 1.26 million last year and a 14-year high of 1.48 million in 2021, when ultra-low interest rates and pandemic tax incentives boosted demand.

"While UK house prices are 0.1% higher over the year, it is the number of sales that have been hit hardest by higher borrowing costs, especially amongst mortgage-reliant buyers," Zoopla's executive director, Richard Donnell, said.

Zoopla forecast that house purchases funded by mortgages would drop 28% this year, while cash buyers would fall just 1% and account for more than a third of sales.

The most recent official data showed that there were 22% fewer house purchases in the three months to the end of June than a year earlier.

Average house prices in May were down 2% from their peak last September, but were still more than 20% higher than before the start of the COVID-19 pandemic, when cheap finance and demand for more spacious homes drove a surge in prices in many Western countries.

Since December 2021, the BoE has raised interest rates 14 times to 5.25% - their highest since 2008 - from 0.1% in a bid to tackle rampant inflation, and markets expect two further rate rises to 5.75% this year.

The BoE is due to release July mortgage lending data at 0830 GMT.

Zoopla provides property valuations and also advertises more than 1 million properties for sale or to rent.

TOKYO (Reuters) - Japan threatened on Tuesday to take China to the World Trade Organization to seek a reversal of Beijing's ban on all of its seafood imports after the release of treated radioactive water from the stricken Fukushima Daiichi nuclear power plant.

Japan's foreign minister Yoshimasa Hayashi told reporters that Japan will take "necessary action (on China's aquatic product ban) under various routes including the WTO framework".

Filing a WTO complaint might become an option if protesting to China through diplomatic routes is ineffective, economic security minister Sanae Takaichi said separately.

The comments came as Japanese businesses and public facilities continued to receive harassment calls from phone numbers with the +86 Chinese country code, with many reporting callers complaining of the Fukushima water release.

Japan's National Policy Agency has received 225 reports of harassment calls to date, Jiji news reported, and the government said it was seeking help from telecommunications companies to block the calls.

An increasing number of landline phone users are requesting to block foreign numbers, said a spokesperson at NTT Communications, a Nippon Telegraph and Telephone (OTC:NPPXF) unit. NTT and other phone companies including KDDI (OTC:KDDIF) and SoftBank (TYO:9984) Corp are discussing measures following the government’s request.

"It is extremely regrettable and concerning about the large number of harassment calls that have likely come from China," Trade minister Yasutoshi Nishimura said during a news conference. He said that according to the people of Fukushima some calls were even going to hospitals, .

"Human life is at stake now. Please stop the calls immediately,” Nishimura said.

The minister said the government is gathering information on the reports of movements to boycott Japanese products in China and would work with business leaders to address the situation.

By Jihoon Lee

SEOUL (Reuters) - South Korea's government plans to raise budget spending to nearly $497 billion for 2024, but the proposed increase is the smallest in two decades as authorities prioritise fiscal discipline amid weakening tax revenue due to slower economic growth.

In its annual spending plan released on Tuesday, the finance ministry set total government expenditure for 2024 at 656.9 trillion won ($496.70 billion), up 2.8% from 2023.

That is smaller than this year's 5.2% increase and the smallest-ever boost since fiscal statistics were last revised at the beginning of 2005, according to the ministry, excluding supplementary budgets.

The conservative Yoon Suk Yeol administration has prioritised improving the government's fiscal position since its term began in May 2022, refraining from splurging taxpayer money to boost growth and emphasising the role of the private sector.

It partly reflects weak tax revenue, estimated to drop by a record 8.3% in 2024 and bring down next year's total government income by 2.2% to 612.1 trillion won, amid slow economic growth and as the government seeks further tax cuts, especially for companies.

The government is forecasting economic growth to weaken to a three-year low of 1.4% this year, after expanding 2.6% in 2022 and 4.3% in 2021. It expects the economy to grow 2.4% in 2024.

South Korea's fiscal deficit will widen to 3.9% of GDP next year, from an estimated 2.6% this year, the ministry said, adding that it will bring back the ratio below 3% from 2025. The debt-to-GDP ratio will rise to 51.0% from 50.4%.

"It was a difficult decision the government made to hold onto sound financing," Finance Minister Choo Kyung-ho said.

About 23 trillion won worth of projects deemed inefficient will be scrapped or scaled down, with more spending on social welfare, childbirth support, investment in key industries, public safety and disaster prevention, among others.

Big spending increases include social welfare, up by 7.5% to 242.9 trillion won, defence up 4.5% to 59.6 trillion won and corporate support by 4.9% to 27.3 trillion won.

The government will issue 158.8 trillion won of treasury bonds in 2024, down from a total of 167.8 trillion won planned for this year. The net increase in treasury bonds is projected at 50.3 trillion won.

It will issue a maximum $1.3 billion worth of foreign exchange stabilisation bonds, compared with $2.7 billion set for this year, and 18 trillion won worth of the bonds in local currency, its first issuance of the kind since 2003, to lower the borrowing cost.

The budget plan will be submitted to the national assembly on Friday, Sept. 1.

($1 = 1,322.5400 won)

(This story has been corrected to fix the year to 2003, from 2013, in paragraph 12)

BEIJING (Reuters) - China will extend preferential tax policies for foreign nationals working in the country through to the end of 2027, the finance ministry said on Tuesday, in a boon to foreign firms struggling to attract talent post-COVID.

The government proposed scrapping the provision of non-taxable allowances for foreign workers in 2022, but decided to extend the scheme on a review basis until the end of this year.

Foreign chambers of commerce and business organisations in China had been seeking urgent clarification on whether the government would further extend the policy that enables expatriates to benefit from taxable deductions on house rental, children's education, language training, and other costs.

"We believe that this will help to curtail further outflows of qualified international talent, while also providing multinational companies with clarity on their talent strategy regarding the deployment of expatriate staff and structuring of their packages," said Kiran Patel, senior director at the China-Britain Business Council.

"This announcement to extend the existing individual income tax regime is a genuine statement of commitment from the Chinese government to the multinational companies operating here."

As China's economy slows, authorities have struggled to revive foreign investment with global firms unimpressed by new incentives they say fall far short of sweeteners once used to attract overseas money.

(Reuters) -U.S.-light vehicle sales are expected to remain steadfast in August but are showing early signs of a slowdown, S&P Global Mobility said on Monday.

"Rising interest rates, credit tightening and new vehicle pricing levels slowly decelerating remain pressure points for consumers," said Chris Hopson, principal analyst at S&P Global Mobility.

New light vehicle sales in August are estimated to be 1.34 million units, up 18% year-over-year, according to the report.

The automotive research company also lowered its annual forecast to 15.2 million units of new light vehicles estimated to be sold in the U.S. from sales of 15.7 million units projected in July.

Supply of vehicles could be disrupted in North America as negotiations with labor unions have been heated up lately, the report added.

"The greatest threat to the forecast in the near-term surrounds the union negotiations between the United Auto Workers in the US and Unifor in Canada with their respective contracts set to expire in mid-September 2023," said Joe Langley, associate director at S&P Global Mobility.

UAW on Friday said members voted overwhelmingly in favor of authorizing a strike at the Detroit Three automakers if an agreement is not reached before the current four-year contract expires on Sept. 14.

By Howard Schneider

JACKSON HOLE, Wyoming (Reuters) - Record levels of government debt, geopolitical tensions that threaten to split the global trading system, and the likely persistence of weak productivity gains may saddle the world with a slow-growth future that stunts development in some countries even before it starts.

That sobering view of a post-pandemic global economy emerged from research organized by the Kansas City Federal Reserve and debated here this past weekend. It explored issues like the outlook for technological innovation, public debt, and the state of international trade at a time when the Russian invasion of Ukraine and conflict between the U.S. and China have eroded a once-broad global agreement, at least in theory, to boost the free flow of goods and services.

"Countries are now in a more fragile environment. They've used a lot of their fiscal resources to deal with a pandemic...Then you have policy-driven forces, geoeconomic fragmentation, trade tensions, the decoupling between the West and China," International Monetary Fund chief economist Pierre-Olivier Gourinchas said in an interview on the sidelines of an annual Fed conference here. "If we get to a point where part of the world is stuck without catching up and has large amounts of population, that creates tremendous demographic pressures and migration pressures."

Gourinchas said it is possible that global growth settles into a trend of around 3% annually, a figure far below rates above 4% seen when rapid advances in China's economy drove global output higher and which some economists consider borderline recessionary in a world where quick gains should still be achievable in large, less-developed countries.

But in the emerging pandemic economy, "the global growth environment has become very challenging," said Maurice Obstfeld, a former IMF chief economist and now a fellow at the Peterson Institute for International Economics in Washington.

China is now suffering what may be chronic economic problems along with a shrinking population. Emerging industrial policies in the U.S. and elsewhere are reordering global production chains in ways that may be more durable or serve national security ends, but also be less efficient.

The symposium is among the first major attempts to take stock of longer-term economic developments after the pandemic and amid renewed geopolitical tensions after years in which officials were at first preoccupied with fighting COVID-19 itself, then had to focus on a global breakout of inflation.

Economists and policymakers here appeared in rough consensus that two trends from before the pandemic, both with global-growth implications, had been intensified by the health crisis and other recent events.

After rocketing higher during the Global Financial Crisis 15 years ago, the ratio of public debt to world economic output has grown to 60% from 40% thanks to pandemic spending and is likely now at a level where serious debt reduction is not politically feasible, Serkan Arslanalp, an economist at the International Monetary Fund, and Barry Eichengreen, an economics professor at the University of California, Berkeley, wrote in a paper.

The implications of public debt that is "here to stay" varies by country, they said, with higher-debt but higher-income nations like the U.S. likely able to muddle through over time, while smaller nations perhaps face future debt crises or binding fiscal constraints.

Globally the fallout could be severe if public borrowing steers capital from countries that still have growing populations and less developed economies, said Cornell University economics professor Eswar Prasad.

"This puts us in a bleak setting, thinking about the parts of the world that are labor rich but capital poor," he said. While the populations of major European nations, Japan, China and the U.S. are all aging, some African nations like Nigeria continue to grow fast.

'A MORE NAIVE TIME'

The other pre-pandemic trend that has endured and intensified is a rising openness to policies that range from the outright protectionist tariffs imposed under former U.S. President Donald Trump to Biden administration efforts to steer production of things like computer chips back to the U.S.

White House Council of Economic Advisers Chair Jared Bernstein said at the symposium Biden administration industrial policies weren't necessarily tilted either for or against more international trade, since many of the intermediate goods needed to make silicon chips, for example, would be imported.

"In my view the strategies we are pursuing despite a lot of heated rhetoric implies neither more nor less trade," Bernstein said during one discussion.

Others noted the Russian invasion of Ukraine, and the fast follow-on divorce of the European power grid from Russian energy, fractured one of the key precepts behind the spread of globalization: Trade would create durable partnerships, if not outright allies.

"I do remember a time, maybe a more naive time...when more trade would create friends," said Ben Broadbent, deputy governor of the Bank of England.

But World Trade Organization Director-General Ngozi Okonjo-Iweala said while the pandemic raised reasonable issues around global supply resilience, particularly for sensitive items like pharmaceuticals, the move to reorder global production patterns risked leaving growth opportunities on the table.

"From a political point of view you can understand how attractive it is to say we see the vulnerabilities so we are going to try to do business with those who have the same values as we do," she said. But whatever the strategy - "nearshoring," "friendshoring," "reshoring" - she argued that "maybe you need to go a little bit further...If you are going to diversify anyway...spread it to those who have been at the margins of the global system."

"Friends," she noted, can change, a pointed statement at a time when Trump, who aimed tariffs at Europe, is running again and recently raised the idea of an across-the-board tax on imports.

If there was a potential bright spot, it was around the discussion of advances in artificial intelligence as a possible driver of higher productivity.

Yet even that was weighed against the possible damage the technologies may do, and against research findings showing innovation was getting exponentially harder.

Even beyond that, any benefits may be slow in coming.

"I think of ChatGPT like Peloton (NASDAQ:PTON)," said Nela Richardson, chief economist for payroll processor ADP, comparing the AI innovator with the maker of upscale exercise bike systems. "You can put as many as you want in a home office. If doesn't mean people are going to use it."

By Ann Saphir

Jackson Hole, Wyoming (Reuters) - The steep jump in public debt loads over the past decade and a half, as governments borrowed large amounts of money to battle the Global Financial Crisis and the fallout from the COVID-19 pandemic, is probably irreversible.

That's the unhappy conclusion of a research paper being presented on Saturday to some of the world's most influential economic policymakers at the Kansas City Federal Reserve's annual central banking symposium in Jackson Hole, Wyoming.

Since 2007, worldwide public debt has ballooned from 40% to 60% of GDP, on average, with debt-to-GDP ratios even higher in the advanced countries. That includes the United States, the world's biggest economy, where government debt is now more than equal to the nation's yearly economic output. U.S. debt was about 70% of GDP 15 years ago.

Despite mounting worries about the growth-crimping implications of high debt, "debt reduction, while desirable in principle, is unlikely in practice," Serkan Arslanalp, an economist at the International Monetary Fund, and Barry Eichengreen, an economics professor at the University of California, Berkeley, wrote in a paper.

That's a change from the past, when countries have successfully reduced debt-to-GDP ratios.

But many economies will not be able to outgrow their debt burdens because of population aging, and will in fact require fresh public financing for needs like healthcare and pensions, the authors argued.

A sharp rise in interest rates from historically low levels is adding to the cost of debt service, while political divisions are making budget surpluses difficult to achieve and more so to sustain.

Inflation, unless it surprises to the upside over an extended period, does little to reduce debt ratios, and debt restructuring for developing countries has become more elusive as the pool of creditors has broadened, Arslanalp and Eichengreen wrote.

"High public debts are here to stay," they wrote. "Like it or not, then, governments are going to have to live with high inherited debts."

Doing so will require limits on spending, consideration of tax hikes, and improved regulation of banks to avoid costly blow-ups, they wrote.

"This modest medicine does not make for a happy diagnosis," they wrote. "But it makes for a realistic one."

(This story has been corrected to clarify that the size of U.S. debt is more than equal to U.S. GDP, not more than double,in paragraph 3)