(Reuters) - Morgan Stanley said it now expects the U.S. Federal Reserve to start lowering interest rates from September, compared to its earlier forecast of July, while continuing to see three 25-basis-point rate cuts through the year.

"A reversal in key components points to disinflation ahead, but given the lack of progress in recent months it will take a bit longer for the FOMC to gain confidence to take the first step," the brokerage said in a note on Tuesday.

By Klaus Lauer

BERLIN (Reuters) - Germany's economy will stagnate in 2024 despite a stronger than expected start to the year, and will continue to lag behind European peers, according to German economic institute IW.

Manufacturing and the construction sector in particular remain stuck in recession, according to IW's latest forecasts, which Reuters is first to report and will be published later on Wednesday.

Consumption will be the only bright spot as it picks up as inflation eases.

"That's not enough for a real upswing. In addition to consumption, investments must finally get going," said IW economist Michael Groemling. "Huge gaps (in investment) have now developed."

Investment is depressed due to the geopolitical situation and high interest rates making financing more expensive.

The German economy shrank by 0.2% last year, the weakest performance among big euro zone economies, as high energy costs, lacklustre global orders and record high interest rates took their toll.

IW forecasts 0% growth for Europe's biggest economy this year, lagging again as France, Italy, Britain and the United States are all expected to expand.

At the start of this year, Germany skirted a recession, growing by 0.2% in the first quarter from the previous three-month period in adjusted terms. In the last quarter of 2023, the economy shrank by 0.5%.

The German government forecasts 0.3% GDP growth this year.

"What is needed is a policy boost that improves business conditions," said Groemling. "If nothing changes, we will continue to squander our potential."

According to the IW estimates, foreign trade will remain weak and hardly provide any economic stimulus this year.

Germany's unemployment rate is likely to increase to 6% on average for the year from 5.7% in 2023, according to IW.

"Despite the record number of 46 million employed people on average in 2024, the effects of the economic weakness on the labour market in Germany are becoming more visible," Groemling added.

By Tingshu Wang, Laurie Chen, Kevin Yao and Farah Master

BEIJING/HONG KONG (Reuters) - After three decades selling homemade buns on the streets of the Chinese city of Xian, 67-year-old Hu Dexi would have liked to slow down.

Instead, Hu and his older wife have moved to the edge of Beijing, where they wake at 4 a.m. every day to cook their packed lunch, then commute for more than an hour to a downtown shopping mall, where they each earn 4,000 yuan ($552) monthly, working 13-hour shifts as cleaners.

The alternative for them and many of the 100 million rural migrants reaching retirement age in China over the next 10 years is to return to their village and live off a small farm and monthly pensions of 123 yuan ($17).

"No one can look after us," said Hu, still mopping the floor. "I don't want to be a burden on my two children and our country isn't giving us a penny."

The generation that flocked to China's cities at the end of last century, building the infrastructure and manning the factories that made the country the world's biggest exporter, now risks a sharp late-life drop in living standards.

Reuters interviewed more than a dozen people, including rural migrant workers, demographers, economists and a government adviser, who described a social security system unfit for a worsening demographic crisis, which Beijing is patching rather than overhauling as it pursues growth through industrial modernisation. At the same time, demand for social services is growing rapidly as the population ages.

"The elderly in China will live a long and miserable life," said Fuxian Yi, a demographer who is also a senior scientist at University of Wisconsin-Madison. "More and more migrant workers are returning to the countryside, and some are taking low-paid jobs, which is a desperate way for them to save themselves."

If these migrants were to rely solely on China's basic rural pension, they would live on less than the World Bank's poverty threshold of $3.65 a day, though many supplement their earnings by labouring in the cities or by selling some of their crop.

China's National Development and Reform Commission, the human resources and civil affairs ministries and the State Council did not respond to faxed requests for comment. 

China's latest statistics showed some 94 million working people - around 12.8% of China's 734 million labour force - were older than 60 in 2022, up from 8.8% in 2020. 

That share, while lower than in wealthier Japan and South Korea, is set to skyrocket as 300 million more Chinese reach their 60s in the coming decade.

A third of this cohort are rural migrants, who typically lack the professional skills for an economy aspiring to move up the value chain.

The main reason China has not built a stronger safety net for them is that policymakers, fearing the economy might fall into the middle-income trap, prioritise growing the pie rather than sharing it, the government adviser told Reuters.

To achieve that, China is directing economic resources and credit flows towards new productive forces, a catch-all term for President Xi Jinping's latest policy push for innovation and development in advanced industries such as green energy, high-end chips and quantum technology.

U.S. and European officials say this policy is unfair to Western firms competing with Chinese producers. They have warned Beijing that it stokes trade tensions, and that it diverts resources away from households, suppressing domestic demand and China's future growth potential.

China, which has rejected those assessments, has instead focused on upgrading production, rather than consumption, as its desired path toward prosperity.

"It would be easier to solve the equality problem if we could first solve the productivity growth problem," said the adviser, granted anonymity to speak freely about pension-policy debates happening behind closed doors.

"People have different views" on whether China can make that leap in productivity, the adviser said. "Mine is that it may be difficult if we do not reform further and remain at odds with the international community."

'VESTED INTERESTS'

Pensions in China are based on an internal passport system known as hukou, which divides the population along urban-rural lines, creating vast differences in incomes and access to social services.

Monthly urban pensions range from roughly 3,000 yuan in less-developed provinces to about 6,000 yuan in Beijing and Shanghai. Rural pensions, introduced nationwide in 2009, are meagre.

In March, China increased the minimum pension by 20 yuan, to 123 yuan per month, benefitting 170 million people.

Economists at Nomura say transferring resources to the poorest Chinese households is the most efficient way to boost domestic consumption.

But the rural pension hike amounts to an annual effort of less than 0.001% of China's $18 trillion GDP.

China's Academy of Social Sciences (CASS) estimates the pension system will run out of money by 2035.
 

Beijing has introduced private retirement schemes and is transferring funds to provinces with pension budget deficits which they cannot replenish themselves due to high debts. 

Other countries have tried to increase pension funding by lifting the retirement age. In China, it is among the lowest in the world at 60 for men and 50-55 for women depending on their line of work.

Beijing has said it plans to raise the retirement age gradually, without giving a timeline.

Government concerns that the population would perceive raising the threshold as benefiting "vested interests" at the expense of ordinary citizens are holding up the implementation of those plans, the adviser said.

Chinese think "officials want to retire later to fatten up their own pensions," he said.

POVERTY THREAT

CASS surveys show the level of healthcare funding for urban workers was in some cases about four times higher than for those with a rural hukou.

"There aren't enough social services to solve the problems of these people, who are prone to falling back into poverty," said Dan Wang, chief China economist at Hang Seng Bank. 

More than 16% of rural residents older than 60 were "unhealthy", compared with 9.9% in the cities, according to an October article by Cai Fang, a CASS economist and former central bank adviser, published in the Chinese Cadres Tribune, a Communist Party magazine.

Sixty-year-old Yang Chengrong and her 58-year-old husband Wu Yonghou spend their days collecting piles of cardboard and plastic for a recycling station in Beijing, earning less than one yuan per kilogram. 
 

Yang said she has heart issues, while Wu has gout, but they can't afford treatment. They fear their 4,000 yuan monthly income is unsustainable as "people consume and waste less."

"Villagers like us work ourselves to near-death, but we must keep working," said Yang, her shoulders covered in snow after a day of scavenging.

Wu, next to her, said they do not dare to retire.

"I only feel secure if I have work, even if it's dirty work," he said.

Traditionally in China, children had been expected to support the elderly.

But most of those retiring in the coming decade, a group almost as large as the entire U.S. population, only had one child due to birth limits enforced from 1980 to 2015.

High youth unemployment compounds the problem.

"Relying on families for elderly care is no longer feasible," Cai wrote in his article.

The silver lining for some of the elderly is that younger Chinese, despite struggling to find the services jobs they went to university for, reject hard labour.

"The mall can't find younger people," said Hu, the cleaner. "As long as I can still move, I'll keep working."

($1 = 7.2448 Chinese yuan renminbi)

By Leika Kihara and Satoshi Sugiyama

TOKYO (Reuters) - Japanese Finance Minister Shunichi Suzuki said on Wednesday authorities were ready to respond to excessively volatile moves in the exchange-rate market.

"It's desirable for currency rates to move stably reflecting fundamentals. Excessive volatility is undesirable," Suzuki told parliament.

"We will continue to monitor currency market developments carefully, and stand ready to respond with all means available," he said.

Suzuki also said authorities were not looking at specific yen levels in deciding whether to take action. He declined to comment on what he deemed as excessively volatile moves.

(Reuters) - Argentina has a new largest banknote, the 10,000 peso, which is five times the size of the previous top bill but still only worth around $10 as the South American country grapples with the world's highest inflation rate that is nearing 300%.

The embattled country's central bank launched the new note on Tuesday, which it said will be rolled out gradually and features independence icons Manuel Belgrano and Maria Remedios del Valle, who were featured on previous smaller bills.

The bank said that the 10,000 peso note, along with an even larger 20,000 peso bill that would come into circulation near the end of the year, would "facilitate transactions between users", simplify financial system logistics and cut costs.

Argentina's triple-digit inflation and steadily depreciating peso currency has over years drained the value of the local tender, leading to a situation where people often carry huge stacks of cash with them to cover costs.

The current top 2,000 peso bill is worth just over $2 at the official exchange rate, far less valuable than the largest note in countries around the region and beyond. The 10,000 note is worth $11 at the official rate but just $9 at freely-accessible parallel rates used to get around strict capital controls.

New libertarian President Javier Milei, who took office in December, is trying to clean up an economic crisis he inherited after years of failure by governments on the left and right to stabilize the grains producing country's financial position.

His tough austerity measures and cost-cutting have helped lower monthly price rises faster than anticipated, even as annual inflation remains sky-high. That's let the central bank cut interest rates significantly over recent months.

($1 = 880.5000 Argentine pesos)

Investing.com -- U.S. stock futures point higher to begin the new trading week as many investors bring forward their projections for Federal Reserve interest rate cuts this year following softer-than-anticipated April employment data. Fed speakers in the coming days are expected to provide more clues into the outlook for borrowing costs in the U.S. Meanwhile, Walt Disney (NYSE:DIS) and Wynn Resorts (NASDAQ:WYNN) make up some of the biggest corporate names set to report their latest quarterly earnings this week.

1. Futures higher

U.S. stock futures ticked higher on Monday, with traders assessing the possibility of Federal Reserve interest rate cuts later this year following the jobs report for last month.

By 03:23 ET (07:23 GMT), the Dow futures contract had gained 51 points or 0.1%, S&P 500 futures had risen by 8 points or 0.2%, and Nasdaq 100 futures had inched into the green by 22 points or 0.1%.

The major averages all advanced in the prior session after the latest U.S. employment numbers suggested that there may be some cooling in the world's largest economy. Employers tacked on 175,000 roles in April, well below estimates, while the jobless rate accelerated marginally to 3.9% from 3.8% in March. Month-on-month wage growth was also slower than projected.

"None of this is terrible – it really isn’t a 'bad' report – but it is the first time we have seen every part of the report come in weaker than expected for a very, very long time," analysts at ING said in a note to clients.

Fed officials have been waiting for indications that the labor market is beginning to loosen before rolling out cuts to borrowing costs, which now stand at a more than two-decade highs. Traders subsequently reacted to Friday's figures by bringing forward their timeline for an initial 25 basis point reduction to September fron November.

2. Fed officials to speak

Markets will likely be keen to glean additional cues on the potential path of interest rates from speeches by several Fed policymakers this week.

On Monday, New York Fed President John Williams and Richmond Fed President Thomas Barkin are both set to speak, followed by Minneapolis Fed President Neel Kashkari a day later. Chicago Fed President Austan Goolsbee and Fed Governor Michelle will make appearances later this week as well.

Earlier this month, the central bank acknowledged a lack of progress on battling inflation, the key focus of a tightening cycle that has pushed rates up to their current heights. However, Chair Jerome Powell noted that he still believes borrowing costs were heading lower this year and said it was "unlikely" that the Fed's next move would be to increase rates once again.

Consumer confidence data on Friday is tipped to provide further insights into the trajectory of U.S. price pressures and the broader economy.

3. Earnings season marches on

Walt Disney, Wynn Resorts and Akamai Technologies (NASDAQ:AKAM) are among some of the larger companies due to report in the week ahead, as the latest quarterly earnings season approaches its final stretch.

Some of the small cap names reporting include nutrition company Bellring Brands (NYSE:BRBR), gambling group Light & Wonder (NASDAQ:LNW) and oil and natural gas firm Permian Resources Corp (NYSE:PR).

Small cap stocks have lagged broader market gains this year. The prospect of the Fed keeping rates elevated for a longer period has clouded the outlook for smaller companies, which rely more heavily on debt financing and consumer spending.

4. Chinese services activity eases slightly in April - Caixin PMI

China’s services sector eased slightly in April but remained at a relatively steady pace, a private survey showed on Monday, as new business activity grew and export demand improved from last year’s lows.

The Caixin Services Purchasing Managers' Index (PMI) came in at 52.5 in April, in line with expectations, and fell slightly from the prior month’s mark of 52.7.

The reading indicated that some aspects of the Chinese economy were resilient thanks in part to sustained stimulus and policy support from Beijing. External demand also appeared to be improving.

“The recovery of the global economy has resulted in an increase in inbound tourist numbers. This has helped produce an upward trend in service exports,” Wang Zhe, Senior Economist at Caixin Insight Group said in a note.

5. Oil prices climb

Oil prices rose in European trade on Monday after Saudi Arabia increased its official selling price for crude in June for most regions.

Meanwhile, media reports said that the latest round of ceasefire talks between Israeli and Hamas delegates in Egypt had ended with no agreement being reached. The ongoing conflict showed little signs of de-escalation, keeping expectations of geopolitical unrest in the Middle East squarely in play. This factored into some bets that continued disruptions in the oil-rich region will eventually dent crude supplies.

Brent oil futures expiring in July gained 0.7% to $83.54 a barrel, while West Texas Intermediate crude futures edged up by 0.7% to $78.32 per barrel by 03:21 ET.

Both contracts slid between 6.6% and 7.5% last week, their worst weekly performance since October.

By Kevin Buckland

TOKYO (Reuters) - The yen continued to drift lower against the dollar on Tuesday as gaping interest rate differentials weighed on the currency, despite fresh warnings from Japanese officials following two rounds of suspected dollar-selling intervention last week.

The Australian dollar hovered close to a two-month high versus its U.S. counterpart with the Reserve Bank of Australia widely expected to keep rates steady later in the day, and traders on watch for a more hawkish stance from Governor Michele Bullock.

The U.S. dollar gained 0.22% to 154.235 yen in early Asian trading, adding to its 0.58% rally from Monday.

On Friday, it sank as low as 151.86 yen for the first time since April 10, as softer-than-expected monthly U.S. jobs data added to the losses following what Bank of Japan data suggested may have been a total of some 9 trillion yen ($58.37 billion) in official intervention.

Japan's Ministry of Finance has refrained from commenting on whether it was behind the dollar selling, but top currency diplomat Masato Kanda repeated on Tuesday that the government "will continue to take the same firm approach" to disorderly yen moves.

However, with a Federal Reserve rate cut likely to take some time and the BOJ taking a cautious approach to tightening following its first rate hike since 2007 in March, the gap between ultra-low Japanese long-term yields and their U.S. counterparts is a vast 370 basis points.

"USD/JPY likely remains attractive to market participants because of the still wide U.S.‑Japan interest rate differentials and healthy risk appetite," Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY), wrote in a client note.

"The risk is USD/JPY creeps back up and forces Japan's Ministry of Finance to intervene," but barring that, the dollar is likely to see a period of consolidation into the Bank of England policy decision on Thursday, she said.

The U.S. dollar index - which measures the currency against six major peers, including the yen, sterling and euro - was little changed at 105.13, after dipping as low as 104.52 on Friday.

The euro was steady at $1.0765 and sterling was flat at $1.2565.

The Aussie edged up 0.17% to $0.6636, heading back towards the high of $0.6650 from Friday, a level last seen on March 8.

All but one of the 37 economists surveyed in a Reuters poll expect the RBA to keep rates on hold, with the other predicting a quarter point rate hike, amid stubbornly high inflation.

At the RBA's last meeting in mid-March, policymakers watered down their tightening bias, although Bullock declined to say whether policy has shifted to neutral, saying risks were "finely balanced", and pushed back immediate rate cuts.

"A different set of central bankers would have had the policy rate higher sooner on the same set of data," Taylor Nugent, a markets economist at National Australia Bank (OTC:NABZY), wrote in a note.

"The RBA's stripes as a reluctant hiker have left the near-term risks from May to August to a hike rather than a cut, even at this late stage of the tightening phase."

($1 = 154.2000 yen)

By Satoshi Sugiyama

TOKYO (Reuters) -Japan may have to take action against any disorderly, speculative-driven foreign exchange moves, the government's top currency diplomat Masato Kanda said on Tuesday, reinforcing Tokyo's readiness to intervene again to support a fragile yen.

"It is preferable for exchange rates to remain in a stable manner following fundamentals, and if the market is functioning soundly in this way, there is of course no need for the government to intervene," Kanda, Japan's vice minister of finance for international affairs, told reporters.

"However, when there are excessive fluctuations or disorderly movements due to speculation, the market is not functioning and the government may have to take appropriate action. We will continue to take the same firm approach as we have in the past."

Tokyo is suspected to have intervened on at least two separate days last week to support the yen after it tumbled to lows last seen more than three decades ago.

Bank of Japan data suggested authorities spent more than 9 trillion yen ($58.4 billion) in defence of its currency, helping lift the yen from a 34-year low of 160.245 per dollar to a roughly one-month high of 151.86 over the span of a week.

The yen was last trading around 154.27 in early Asia.

Japan is reluctant to intervene in the currency market considering its limited available dollar cash reserves and U.S. Treasury Secretary Janet Yellen's comments that such moves were acceptable only in rare circumstances, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

By Howard Schneider

COLUMBIA, South Carolina (Reuters) -Finishing the battle against inflation will likely require a hit to demand, after a year in which U.S. price pressures cooled largely through improvements in the supply side of the economy with virtually no change in the unemployment rate, Richmond Federal Reserve President Thomas Barkin said on Monday.

"We got a lot of benefit last year on the supply side," Barkin said, noting a rise in immigration and a jump in productivity as forces that allowed the economy to grow fast and add jobs while allowing inflation to fall quickly.

But with the pace of price increases possibly stalled at a rate above the Fed's target, "I do tend to imagine that we're going to need a little more edge off of demand to get all the way" back to target, Barkin said in comments to reporters after an event at the Columbia Rotary Club.

He said he is "optimistic" that the current level for the benchmark policy rate, held in a range of from 5.25% to 5.5% since July, will be adequate to do the job, and that he doesn't see the economy overheating.

But he also said his sense of the risks facing the Fed are weighted towards inflation proving tougher to tame than expected.

"I still have the weight going toward inflation," Barkin said. "It's a stubborn road back...It doesn't mean you won't get it back. It just means it takes a while...to corral price setters into believing they don't really have a chance" for aggressive increases.
 

Barkin is a voter this year on interest rate policy, and supported the Fed's decision at its meeting last week to hold rates steady.

His comments about demand suggest that the final phase of inflation control may hinge on the sort of blow to economic growth - and by implication the job market - that policymakers have been hoping to avoid.

As of March the Fed's preferred measure of inflation, the personal consumption expenditures price index, was rising at a 2.7% annual rate - far below the peaks seen in 2022, but largely stalled through the first months of the year.

Barkin said he still viewed demand in the economy as strong, but added that the sort of slowdown needed to finish the Fed's inflation battle needn't be all that deep.

"If the economy does cool, it doesn't need to be as painful" as the sharp slowdown seen from 2007 to 2009, for example, he said.

Because the economy seems so resilient, with the unemployment rate at 3.9% and job growth perhaps beginning to fall more in line with pre-pandemic levels, Barkin said the Fed could afford to wait and be sure inflation will resume its decline.

The start of the year "has only confirmed the value of the Fed being deliberate," said Barkin in his address. "The economy is moving toward better balance, but no one wants inflation to reemerge. We have said we want to gain greater confidence that inflation is moving sustainably toward our 2% target. And given a strong labor market, we have time to gain that confidence."

(Reuters) - U.S. banks reported renewed weakening in demand for industrial loans and a decline in household demand for credit in the first quarter of the year, according to a Federal Reserve survey of senior loan officers published on Monday.

Fed officials had the survey results in hand last week when they decided to keep the policy rate steady in the 5.25%-5.5% range and said they plan to hold them there as long as needed to bring down inflation.

Monetary policy tightening typically works to ease price pressures through credit channels, with higher borrowing costs reducing demand for loans. 

That process appeared to be ongoing during the first quarter, with the exception of commercial real estate lending, where signs pointed to some improvement in credit supply and demand.

"Many consumers and businesses are feeling the pinch from reduced credit availability even as the Fed looks set to keep interest rates higher into 2025," wrote Nationwide economist Ben Ayers. "This could set the stage for weaker activity ahead and makes the economy more susceptible to an unexpected shock."

The net share of large and medium-sized banks reporting tightening standards for commercial and industrial loans ticked up to 15.6%, from 14.5%, the survey showed. A rising share of banks reported weaker demand for C&I loans.

For commercial real estate loans of all types, however, the share of banks tightening standards shrank to the lowest in two years. A declining share reported weaker demand for CRE loans; foreign banks reported an overall rise in demand for CRE loans.

For households, a rising share of banks reported tightening standards for auto loans, while a shrinking share of banks did so for credit cards and other types of consumer loans, the survey showed.

Household loan demand deteriorated across all categories, the survey showed, with demand for auto loans at its weakest in a year.