China Stimulus Expectations May Be Overdone

(…) The Shanghai and Hong Kong equity markets gained ground after the data release on expectations sliding growth would push the government into stimulus mode. In a small way, that shift has already occurred. A meeting of the State Council last week promised to accelerate construction projects to “keep economic activity in a suitable range.”

Still, with the government facing conflicting pressures an abrupt about-face in policy is unlikely. A significant step toward stimulus would be a step back from Iron Ore Prices Point to Slowing Growth reforms intended to control runaway corporate credit and local government debt. Doing so might risk a sharper correction down the road.

The State Council’s statement suggests little in the way of new government spending. promises to accelerate existing projects rather than to start new ones, indicating little additional impetus from the public purse.

Similarly, the People’s Bank of China’s recent reintroduction of the 28-day repo at a rate of 4 percent suggests the central bank wants to re-anchor rates at a higher level. At the recent National People’s Congress, PBOC Governor Zhou Xiaochuan said interest rate liberalization is on an accelerated track and is expected to push rates higher.

A growing number of analysts expect a cut in the reserve requirement ratio, which would boost bank lending. The reserve requirement ratio is a blunt instrument, and a cut would signal to the markets that the central bank is stepping back from its deleveraging agenda. Fine tuning liquidity via open-market operations may be a preferable alternative at this point. (…) (BloombergBriefs)

Meat Eaters Gulp Record Prices Before U.S. Grilling Peaks

(…) At a time of year when U.S. prices usually are at seasonal lows, meat is rising faster than any other food group, even before the peak in demand for summer grilling. The domestic cattle herd is the smallest since 1951, after years of drought and high feed costs, and the spread of a piglet-killing disease is tightening hog supplies. Cattle and hog futures in Chicago reached record highs this month. (…)

Cattle futures reached an all-time high of $1.46825 a pound on March 5 on the Chicago Mercantile Exchange, up 25 percent from last year’s low in May. Hog futures surged to a record $1.33425 a pound on March 18 and are up 48 percent this year, trailing only coffee among 24 commodities tracked by the Standard & Poor’s GSCI Spot Index.

Domestic wholesale pork is up even more, gaining 56 percent this year to $1.315 a pound on March 21, while beef advanced 20 percent, after touching $2.4406 a pound on March 18, the most since the U.S. Department of Agriculture began using its current measure in 2004.

As of Feb. 25, the USDA predicts retail beef and poultry prices will advance 3 percent to 4 percent this year, faster than the 2.5 percent to 3.5 percent increase forecast for all foods. Steve Meyer, a consulting economist in Adel, Iowa, for the National Pork Board, said the government’s meat forecasts are too low, and that pork will jump as much as 10 percent. (…)

Rising meat costs and food inflation may force Denver-based Chipotle to raise menu prices 3 percent to 5 percent, CFO John R. “Jack” Hartung said on a conference call Jan. 30. (…)

CANADIAN HOUSING

Forget about a crash, Conference Board gives housing market clean bill of health

The Conference Board isn’t buying the notion that Canada’s housing market will suddenly crumble, saying the most likely outlook is for a modest decline nationally and in some specific markets.

The Ottawa-based think-tank argues in a comprehensive new look at real estate in Canada that the conditions for a crash simply don’t exist, despite numerous reports that the market is overbuilt and overvalued.

Rather, the report argues that with the possible exception of Toronto, housing starts the past three years have been roughly in line with the 20-year average.

Even in Toronto, there is only a “borderline” case that it could be overbuilt.

“At this point in the housing cycle, there is a risk that Canadian housing prices in some market segments are due for a modest correction,” the report states.

“Nevertheless, we believe that continued population growth, additional employment gains and modest mortgage rate increases will limit potential price declines in 2014 and 2015.” (…)

The Conference Board says fears of a housing bubble about to burst in Canada are exaggerated.

It says some of the evidence cited by correction hawks, including comparing home prices as a multiple of rental costs, don’t take into account historically low mortgage rates that keeps affordability steady. Citing Toronto, it notes that in 2013 mortgage payments consumed less than 20 per cent of average household income, the same as in 1993. (…)

Even when mortgage rates do start rising, the Conference Board believes it will happen gradually and over an extended period. For instance, it forecasts rates with only a gain of 200 basis points – two percentage points – by 2017 or 2018.

But at current low rates, the typical homeowner on a posted five-year rate will have paid down $42,104 principal on a $100,000 in mortgage debt, so affordability won’t be seriously affected once it comes time to renew at a higher rate.

Russian Capital Flight Surges Russia will see the largest capital outflow since the 2008 financial crisis in the first quarter of this year, the country’s deputy economy minister said, as relations with the West have sharply deteriorated since Moscow annexed Crimea this month.

Capital outflow in the first three months of 2014 will reach between $65 billion and $70 billion, Andrei Klepach said, slightly higher than for the whole of last year, and the highest level since the fourth quarter of 2008. Almost half of the quarterly outflow took place in March. (…)

The deputy minister said he expects there was no growth in Russia’s economy during the first quarter, despite an acceleration in annual growth in February to 0.3% from 0.1% in January.

“February is better than we had expected, but the growth is unstable and it is too early to talk about an exit from stagnation,” he said, adding that the economy’s growth during the first two months of the year was below the level needed to achieve the government’s target of 2.5% in 2014. (…)

Mr. Klepach said he expected no easing of the central bank’s monetary policy in the near future, as inflation is forecast to reach between 0.9% and 1.0% in March. Such a monthly rate suggests annual inflation of between 6.9% and 7.0%, well above the central bank’s target of 5%.

This is called stagflation.

S&P Downgrades Brazil Credit Rating Standard & Poor’s on Monday cut its credit rating on Brazil to one notch above junk territory, underscoring the deterioration of the once-highflying economy.

Standard & Poor’s said the weak economic growth prospects, rising debt and a widening government deficit weakened the government’s ability to cope with external shocks.

The rating firm said that government debt is set to rise to as high as 45% of gross domestic product. The firm estimated that the government’s funding shortfall would grow to 3.9% this year from 3.2%.

Internet groups face global tax crackdown OECD to tackle avoidance within digital economy

(…) Plans to “restore taxation” in the countries where digital companies make their sales and base their headquarters were set out on Monday in the first international response to the worldwide political row over the sector’s low tax payments. (…)

The findings have big implications for the e-commerce industry, which was worth more than $13tn in 2012 and accounted for nearly a fifth of companies’ turnover in European countries such as Finland, Hungary and Sweden. They will particularly affect India, Ireland, the US, Germany, the UK and China, which account for about 60 per cent of the world’s exports of information and communication technology services. (…)

The OECD is determined to eliminate structures popular with digital companies such as the “double Irish” which exploit differences between the US and Irish tax codes to move profits from Ireland to zero tax countries such as Bermuda. It said: “Structures aimed at artificially shifting profits to locations where they are taxed at more favourable rates, or not taxed at all, will be rendered ineffective by ongoing work in the context of the Beps project.”

Much of the impetus for the planned overhaul of international tax rules has been the dramatic growth of internet groups, now among the world’s largest companies, which can do billions of pounds worth of business in countries where they have little or no physical presence.

The report said “the fact that it is possible to generate a large quantity of sales without a taxable presence” raised questions about whether the current rules were fit for purpose in the digital economy. It put forward options for changing the rules determining whether a company has a taxable presence including instances where a company had “fully dematerialised digital activities”.

The OECD also highlighted the role played by intellectual property in digital companies saying under current rules, the legal ownership of intangible assets can easily be separated by the activities that led to their development. It has consulted on planned changes to rules concerning intangibles which will drastically reduce the profits that can be attributed to countries where there were no real activity, other than the legal ownership of intellectual property.

It is also considering other changes to the rules on “transfer pricing” – which determine how taxable profits are allocated between countries – that would make it easier to achieve a reasonable split of profits between countries in cases where conventional techniques did not give the correct result.

The Beps project is moving at a rapid pace in an attempt to reduce the pressure on governments to take uncoordinated unilateral measures. Comments on the discussion document must be lodged by April 14, before a September deadline for its completion.

Grad Students’ Loans Surge Report’s Findings Could Reframe Debate on Americans’ Growing Burden

The typical debt load of borrowers leaving school with a master’s, medical, law or doctoral degree jumped an inflation-adjusted 43% between 2004 and 2012, according to a new report by the New America Foundation, a left-leaning Washington think tank. That translated into a median debt load of $57,600 in 2012.

The increases were sharper for those pursuing advanced degrees in the social sciences and humanities, versus professional degrees such as M.B.A.s or medical degrees that tend to yield greater long-term returns. The typical debt load of those earning a master’s in education showed some of the largest increases, rising 66% to $50,879. It climbed 54% to $58,539 for those earning a master of arts.

By comparison, the typical student-debt burden of borrowers leaving school with a bachelor’s degree climbed 39% over the same period, to $27,000 in 2012.

The report, to be released Tuesday, shows how much of the increase in student debt over the past decade has been concentrated in a minority of students. In the 2012-13 academic year, graduate students accounted for about 1 in 6 student-loan recipients but between 30% and 40% of student debt extended by the federal government.

Policy makers and student advocates are increasingly concerned about students who leave school with high debt and can’t find work, and then fall behind on payments. That damages their credit and can limit purchases of homes, cars and other items that drive economic growth. (…)

Numerous factors are driving the increase in student debt. Many households lost savings and other assets during the recession, prompting more students to borrow. Schools have raised prices, citing cuts in state aid. And a greater share of students are pursuing advanced degrees than in previous generations to gain new skills and adapt to a modern economy.

The foundation’s report also points to a 2006 law that removed a limit on how much graduate students may borrow from the federal government. Before the change, graduate students—excluding medical students—could borrow no more than $138,500 total for their education and were limited in how much they could borrow annually. Now they can borrow up to the “cost of attendance,” a figure that includes tuition, books, transportation and living expenses. Undergraduates still face a lifetime borrowing cap, currently $57,500.

More graduate students are taking on debt loads approaching six figures. One in four borrowers who earned a graduate degree in 2012 owed at least $99,614 in student loans. Eight years earlier, the top quartile of borrowers owed $70,907 in 2012 dollars.

In 2012, one in 10 students leaving school with an advanced degree owed at least $153,000 in student debt, far above the previous borrowing limits. (…)

Pension Plans Brace for a One-Two Punch Just as companies thought their pension plans might be climbing out of the red, they are about to get hit with a double whammy of higher fees and ballooning obligations.

Not only do employers face a 52% increase by 2016 in the regulatory cost of administering their pension plans, but also a $150 billion surge in liabilities from longer-living retirees. (…)

The Society of Actuaries recently updated its mortality tables for the first time since 2000 to reflect the longer life spans of today’s retirees. Based on the update, the average man who turns 65 this year is expected to live to 86.6, up from 82.6 in 2000. Women are expected to live to 88.8, up from 85.2. That means companies will have to sock away more money to pay benefits years longer.

The new tables will be finalized later this year and become the standard auditors use to gauge corporate pension obligations. Mercer LLC estimates that corporate pension liabilities totaled about $2 trillion at the end of 2013. The increased life expectancy will add about 7% to the pension obligations on balance sheets, according to consulting firm Aon Hewitt. (…)