September 22, 2019

Plan at G-20 Is to Tighten Global Rules on Taxes

They are expected on Friday to agree to enact new tax laws that would limit the ability of multinational corporations like Apple and Starbucks to legally avoid paying taxes by operating subsidiaries in certain countries.

The practice came to the fore during the global recession as national coffers were strained and leaders looked for new sources of revenue. The recent positive economic news has not damped that desire or relieved the pressure to crack down.

In the United States, economic news has pointed to continued growth. On Friday, the Labor Department is expected to issue a healthy jobs report with 180,000 jobs created in August. It is the last set of economic data the government will release before the Federal Reserve meets to consider tightening monetary policy and raising interest rates in the United States.

On Thursday, the Institute for Supply Management issued its closely watched report, which said service companies were hiring more, and fewer people are applying for unemployment benefits. Auto sales are up sharply.

Recent economic reports from Britain, France, Germany and other countries in Europe’s northern tier have also been optimistic, although central bankers there remain cautious.

If the United States government reports that even more jobs were created, analysts expect that the 10-year Treasury note, which rose to 3 percent on Thursday, will rise further.

Currencies in many of the developing economies that benefited from the expansionist policies of the Federal Reserve have recently been falling sharply against the dollar as the Fed signaled its plans to tighten, and as money flows have reversed. Growth in many of the so-called BRICS economies — Brazil, Russia, India, China and South Africa — that had buoyed global growth have slowed as momentum shifts to the United States, Japan and northern Europe.

The heads of state have two days of meetings and will issue a communiqué on Friday that is expected to address the tax overhaul and other questions of economic policy.

Though the meeting is overshadowed by the crisis in Syria, and deep divisions between nations over possible American military action there, the heads of state are still expected to collectively endorse an economic policy statement that will encourage the continuing fiscal stimulus, or government spending, to help the recovery.

Germany, in the driver’s seat of European economic policy, had objected but appeared ready to acquiesce to a statement endorsing fiscal stimulus at a ministerial-level meeting in July in Moscow.

That meeting also encouraged governments to carefully coordinate tapering off monetary stimulus programs like the Federal Reserve’s so-called quantitative easing. The end of cheap credit has curbed growth in emerging markets as investors bring money back to the United States to take advantage of rising interest rates.

On Thursday, Russia’s deputy minister of finance, Sergei A. Storchak, said the leaders were set to endorse a similarly worded statement on Friday.

“It’s not going to be more than the agreements that were reached in Moscow,” Mr. Storchak told Reuters at the summit meeting, being held in the restored Czarist-era Catherine Palace in St. Petersburg.

In a reflection of the depth of concern about currency outflows caused by rising interest rates in the United States — meaning investors can obtain similar returns in emerging markets at far lower risk — the BRICS nations announced an intention to create a collective fund of $100 billion to defend their weakening local currencies. It was unclear when it would be operating and able to intervene in currency trading.

The effort at tax reform, if enacted widely, would squeeze more money from multinational corporations and shift a portion of the global tax burden from individuals and small businesses to large corporations. The proposal is for countries to better coordinate tax treaties to close loopholes that multinational corporations exploit by registering in tax havens like Delaware or the Cayman Islands. Another tactic of concern is shifting profits to low-tax jurisdictions and costs to high-tax ones.

In one widely cited example, Starbucks last year paid no corporate tax in Britain despite generating sales of nearly $630 million from more than 700 stores in that country. The company volunteered to pay more in coming years. Apple, despite being the most profitable American technology company, avoided billions in taxes in the United States and around the world through a web of complex subsidiaries.

Even with the high-level agreement, it will take years to put in place, and companies that benefit and have structured their business to comply with the laws in place today are all but certain to lobby to retain these advantages. The G-20 governments endorsed a draft of the tax agreement in Moscow in July.

The reform would encourage nations to adopt new standardized tax treaties, to replace the web of thousands of such agreements that exists now.

Russia is hosting the G-20 for the first time since the group was formed in 1999 and began discussing strategies for priming the global economy.

Mr. Storchak, the deputy finance minister in Russia, said in an interview before the opening meeting on Thursday that Russia had asked all governments to explain their spending plans for the years ahead, and that most had complied and agreed to release the results of this survey during the forum.

Article source:

Economix Blog: Live Updates on the Fed Announcement

Markets are in a state of almost eerie calm as investors await the Federal Reserve statement.

Through early afternoon, the major stock indexes were trading within 0.2 percent of Tuesday’s close. Traders have talked about saving up their firepower to respond to the Fed later in the day. A note from RBS strategists said that the markets they were watching “were very narrow as we wait for today’s Fed meeting.”

This is a sharp departure from the volatility in the markets over the last few weeks, as investors have furiously tried to divine the Fed’s future intentions and prepare their portfolios for any change.

Since Mr. Bernanke said on May 22 that the central bank could look at changing policy “in the next few meetings,” the Standard Poor’s 500-stock index has had five days with at least a 1 percent move.

On days when it appeared that the Fed might be preparing to pull back on the stimulus, stocks have generally sold off, while indications that the Fed might continue on with the stimulus have led markets up. The swings back and forth have left the benchmark index down slightly from where it was on May 22.

Some of the most serious action has been taking place in the bond markets, which are particularly sensitive to the possibility that the Fed could step back from its purchases of government and mortgage bonds. The yield on the 10-year Treasury note, which goes up when investors sell bonds, has risen from 1.6 percent in early May to 2.2 percent on Tuesday. This has pushed up mortgage rates, which has already driven down the number of homeowners refinancing their mortgages.

Much of the activity has been about preparing for what the Fed’s statement will say, and how Mr. Bernanke will explain it in his news conference. If Mr. Bernanke gives any indication that the Fed is looking at “tapering” its bond purchases, stocks and bonds are expected to sell off.

There are also some hopes that Mr. Bernanke will provide clarity about whether he plans to leave the Fed when his term runs out in January, which would probably influence the future direction of Fed policy.

Nathaniel Popper

Article source:

DealBook: How Much Does the Fed’s Plan Really Help Main Street?

Ben Bernanke, the Federal Reserve chairman, said Thursday that the Fed’s new stimulus was meant to help Main Street.

One way to gauge the extent to which Main Street might benefit is to look at the interest rates ordinary people pay on their mortgages, credit cards and car loans. Those rates, however, don’t make the strongest case for Mr. Bernanke being a man of the people.

Since 2008, the Federal Reserve has purchased some $2.75 trillion of bonds. On Thursday, it promised to keep buying bonds until it felt comfortable that the jobs market was properly back on its feet.

The Fed’s purchases aim to drive down borrowing costs for companies and consumers. In theory, this will make them more likely to take out loans to buy goods and services, stimulating the wider economy in the process.

By some measures, the Fed’s policies have worked. Mortgage rates have fallen to multidecade lows, large corporations have had no trouble issuing bonds, the economy is growing and the private sector has been adding jobs for months now.

The Fed’s largess has even helped borrowers much lower down the credit scale. Lenders are making lots of subprime auto loans right now. Some $14 billion of such loans have been packaged up into bonds and sold to investors so far this year, according to Fitch Ratings. At the rate companies are lending, the 2012 total for subprime car loans could exceed $20 billion, which would put this year on par with 2005, a boom year.

But in many cases borrowers could be getting an even bigger benefit. As the Fed’s actions have pushed down some key rates, the ones that consumers borrowed at haven’t fallen anywhere near as much.

The federal funds effective rate, one short-term rate that banks use to lend to each other, is at 0.14 percent. That compares with a rate of 3.62 percent in September 2005.

The 10-year Treasury note has a yield of 1.87 percent, down from 4.2 percent in 2005. These are huge declines.

Yet the cost of credit card loans has hardly budged. The Fed’s own data shows that average credit card interest rate was 12.06 percent earlier this year; in 2005, it was 12.45 percent.

One explanation is that the banks making credit card loans have to charge that level to cover the costs of their own borrowing. But that doesn’t seem to be the case.

For instance, JPMorgan Chase, a big credit card lender, paid an average of just 0.76 percent on its liabilities in the second quarter of this year. That’s way down from 3.1 percent in 2005.

The banks’ fears of credit-card defaults could be a driver. They may want to charge more than 12 percent to cover these potential costs, which are always part and parcel of doing credit card loans. If so, that fear could prevent certain consumer rates from falling much further, limiting the impact of the Fed’s policies.

But even when fear of default is removed from the equation certain interest rates seem to be stuck too high.

Take mortgages. The federal government agrees to shoulder the cost of defaults in nearly all of the mortgages made today. Banks make mortgages to borrowers, and then take those loans and attach the government guarantee of repayment to them.

After that, they package the loans into bonds, which they then sell to investors. The Fed’s purchases of these bonds have helped their yields fall to 2.2 percent. But the cost of mortgages to borrowers hasn’t fallen anywhere near as much.

The banks are choosing not to reduce mortgage rates further. One reason: By keeping the rates elevated, they are able to earn much larger profits when they sell the mortgages into the bond market. If the level of profits on those sales stayed at recent average levels, borrowers might, for instance, pay $30,000 less in interest payments on a $300,000 mortgage, according to a recent New York Times analysis.

Based on these practices, it seems as if the banks are an obstacle to the Fed’s latest efforts to generate economic growth. It’s almost impossible to imagine the Fed forcing banks to lower credit card rates, or take lower profits on their mortgage sales.

Main Street may therefore have to wait a long time for the full effect of the Fed’s latest actions.

Article source:

Stocks and Bonds: Shares Down Moderately on U.S. Debt Talks

The lack of a deal to raise the debt limit in the United States hung over the financial markets on Monday, unsettling investors because of the uncertainty but not provoking a major reaction in bond or stock prices.

House Republicans and Senate Democrats were readying competing plans in an effort to avoid a federal default next week. Republicans were trying to sell to their rank and file a two-step plan that would allow the federal debt limit to immediately rise by about $1 trillion and tie a second increase next year to more deficit reductions.

“We are being subjected to headline after headline, interview after interview, extolling the horrors of what happens if the debt ceiling isn’t raised,” said Hank Smith, Haverford’s chief investment officer of equity.

“Yet the market is ignoring this and for the most sensitive part of the market, the bond market, it is a big yawn,” he added.

At the close, the Dow Jones industrial average was down 88.36 points, or 0.70 percent, to 12,592.80. The broader Standard Poor’s 500-stock index was down 7.59 points, or 0.56 percent, to 1,337.43. The Nasdaq was down 16.03 points, or 0.56 percent, to 2,842.80.

The unease was also signified by investors turning to the perceived safety of gold and by a slight rise in Treasury yields.

Stocks had declined sharply at the opening before retracing some ground.

“Obviously the market was selling off, but during the course of the day I think that market participants were getting a growing sense that something will be carved out, that there will be something that that will placate markets before the deadlines,” said Quincy Krosby, a market strategist for Prudential Financial.

The price of the benchmark 10-year Treasury note fell 11/32 to 101 1/32, pushing the yield up to 3 percent, from 2.96 percent late Friday. Guy LeBas, the chief fixed-income strategist for Janney Montgomery Scott, said the Aug. 2 deadline was forming a “gigantic overhang” in investors’ minds. He said that while the risk grows day by day, “a default is not the most likely outcome right now.”

Investors were becoming leery of Washington’s ability to come to an agreement on a debt deal, said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company, in a research note.

“The world owns our debt and wants to continue to hold it as long as we can find a way to keep issuing what was once considered, and likely still is, the safest debt on the planet,” Mr. Giddis wrote in a research note.

Investors have driven gold above $1,600 an ounce in recent days amid the uncertainty.

“With little optimism on U.S. debt talks at the moment, the gold price acutely reflects investor nervousness that limited progress will be made before the Aug. 2 deadline,” Edel Tully, a strategist at UBS, wrote in a research note. “This nervousness is in many ways justified as the threat of a U.S. ratings downgrade is very real.”

The markets have also been buffeted by the uncertainty around Greece, where European leaders last week were able to agree on a bailout package. Still, on Monday, Moody’s downgraded Greece’s local and foreign currency bond ratings, saying that there were still implications for private creditors of “substantial economic losses” on their holdings of government debt.

In Europe, the FTSE 100 index of leading British shares closed down 0.16 percent at 5,925.26, while Germany’s DAX was up 0.25 percent to 7,344.54. The CAC 40 in France ended 0.77 percent lower at 3,812.97.

The euro was trading slightly lower against the dollar, at $1.4374.

The spread on Italian and Spanish bonds against German bonds widened on Monday.

Earlier in Asia, Japan’s Nikkei 225 closed down 0.8 percent at 10,050.01, while Hong Kong’s Hang Seng Index lost 0.7 percent to 22,293.29.

China’s Shanghai Composite Index slid nearly 3 percent to 2,688.75. The Associated Press reported it was the biggest one-day loss in six months.

Article source:

Stocks Fall on Weak Economic News

The Labor Department said more people applied for unemployment benefits last week, the first increase in three weeks. The number of people seeking benefits rose by 10,000 to 424,000, more than analysts were expecting.

Applications are above the 375,000 level that is consistent with sustainable job growth. Applications peaked at 659,000 during the recession. Employers stepped up hiring this spring, but some economists worry that rising applications for unemployment benefits indicate hiring is slowing.

The Commerce Department said the economy grew at a sluggish 1.8 percent annual rate in the January-to-March quarter as surging gasoline prices and sharp cuts in government spending overshadowed strong corporate earnings. Consumer spending grew at just half the rate of the previous quarter, less than previously estimated. A surge in imports widened the United States trade deficit.

Economists believe the economy is doing only slightly better in the current April-to-June quarter. Consumers remain squeezed by gas prices near $4 a gallon and renewed threats from Europe’s debt crisis.

In early trading, the Dow Jones industrial average fell 58.54 points, or 0.5 percent. The Standard Poor 500-stock index fell 4.07 points, or 0.3 percent. The Nasdaq composite index was flat.

The weak economic news drew investors toward safer assets. The yield on the 10-year Treasury note fell to 3.11 percent, near its lowest level of the year. It was trading at 3.15 percent shortly before the economic reports came out. Bond yields fall when their prices rise.

Concerns about the European debt crisis continue to weigh on markets. Stocks fell for three days before Wednesday’s gains, which came as higher oil prices lifted energy stocks.

Greece’s government and opposition party failed late Tuesday to reach agreement on how to pare the country’s debts, adding to the uncertainty surrounding Greece’s financial future. Many analysts believe Greece will eventually have to restructure its debt, possibly by extending interest payments or lowering interest rates.

Analysts are also concerned about how much of an impact the supply disruptions stemming from the March earthquake and tsunami in Japan will have on manufacturing in the United States, especially on factories making cars and electronic products that depend on component parts from Japan.

Some analysts think Japan’s supply chain problems could shave as much as one-half a percentage point from growth in the April-to -June period.

In the morning, the Energy Information Administration is to release its weekly report on the nation’s crude oil supplies for the week ended May 20. Analysts expect a 1.6 million-barrel decrease, according to a survey by Platts, the energy information arm of McGraw-Hill. They expect gasoline supplies to rise by 750,000 barrels, distillate stocks to grow by 500,000 barrels and refinery utilization to increase 0.4 percentage point to 83.6 percent of capacity.

On Wednesday, the Dow Jones industrial average rose 38.45 points, or 0.3 percent, to close at 12,394.66. The Standard Poor index rose 4.19, or 0.3 percent, to 1,320.47. The Nasdaq rose 15.22, or 0.6 percent, to 2,761.38.

Article source:

Wall Street Shares Slide After Weak Jobs Data

Wall Street shares fell sharply after the payroll processor ADP said that 179,000 new private sector jobs were added in April. That figure was lower than the 195,000 analysts had expected.

The ADP report is closely watched because it can provide insights into the government’s monthly jobs report for April, which comes out Friday.

Shortly after noon, the Dow Jones industrial average was down 128.51 points or 1 percent. The broader Standard Poor’s 500-stock index lost 14.23 points or 1 percent. The technology heavy Nasdaq fell 29.04 points, or 1 percent.

The Institute for Supply Management also said its service sector index rose at the slowest pace in eight months. That raised concerns for the health of the service industry, which employs about 90 percent of the work force.

The latest round of earnings were mixed on Thursday. The Kellogg Company, the world’s biggest cereal maker, said its net income fell 12 percent because of higher costs. The results missed analysts’ expectations and its shares dropped 0.8 percent.

Time Warner, the owner of Warner Brothers and HBO, said its first-quarter earnings fell 10 percent because of a lack of hit movies in the period. But advertising revenue rebounded, and the results surpassed the expectations of analysts. Its shares were down 2.7 percent.

AOL’s net income dropped sharply as the Internet company reported lower advertising and subscription revenue. Its shares slipped by 0.7 percent.

Bond prices rose, sending yields lower. The yield on the 10-year Treasury note fell to 3.22 percent from 3.26 percent late Tuesday.

In Europe, fears of more interest rate increases in China weighed on markets Wednesday, while the euro headed up toward 18-month highs against the dollar despite confirmation of a $116 billion bailout for Portugal.

The FTSE in London fell 1.62 percent, while the DAX in Frankfurt lost 1.69 percent. The CAC 40 in Paris was 1.31 percent lower.

After an interest rate increase by India’s central bank, the People’s Bank of China expressed its continued concerns over inflation, stoking speculation that it may raise interest rates again in the months ahead.

“Fears about further Chinese monetary policy tightening are being linked with the poorer tone after the People’s Bank of China said stabilizing prices is critical,” Jane Foley, an analyst at Rabobank International, said.

As a result, Chinese shares were the big losers Wednesday, with mainland Chinese shares posting their biggest loss in over two months. The Shanghai composite index fell 2.3 percent to 2,866.02, while the Shenzhen composite index lost 2.2 percent to 1,187.28. Shares in oil, coal and real estate industries weakened.

While jobs take center stage in the United States, Europe will focus on interest rate decisions from the European Central Bank and the Bank of England. Neither is expected to change interest rates, though the European bank is expected to indicate Thursday that it will follow April’s first interest rate increase in nearly three years with another rise in June.

That belief has bolstered the euro over the last couple of months despite ongoing debt problems, most notably in Greece, Ireland and Portugal. While the European Central Bank is poised to raise interest rates again in the coming months, the Federal Reserve has shown few signs that it is ready to lift its super-low interest rates. That’s added to the dollar’s recent weakness against the euro.

The euro was trading $1.4861 after briefly rising above the $1.49 level.

The euro gained despite figures showing a 1 percent decline in retail sales in the 17 countries that use the euro in March, and confirmation that Portugal has agreed to a bailout of 78 billion euros ($116 billion) from its partners in the European Union and the International Monetary Fund.

“For the foreign exchange markets, the details of Portugal’s bailout terms are of little relevance with the focus still firmly on diverging policy between the U.S. and elsewhere,” said Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi UFJ.

Article source:

Economic Reports Offset Earnings on Wall Street

The Federal Reserve said Friday that factories increased production for the ninth consecutive month. Separately, the Labor Department said inflation rose just 0.1 percent last month excluding food and gas prices. That was far better than the 0.2 percent increase economists were expecting.

Bond prices rose as inflation concerns eased. The yield on the 10-year Treasury note fell to 3.41 percent from 3.51 percent late Thursday. Bond yields fall when their prices rise.

At the close, the Dow Jones industrial average was 56.68 points or 0.46 percent higher at 12,341.83, while the Standard Poor’s 500-stock index gained 5.16 points, or 0.39 percent, to 1,319.68. The technology heavy Nasdaq was up 4.43, or 0.16 percent, to 2,764.65.

Google dragged down the Nasdaq index after the company that missed analysts’ estimates, in part because it is in the midst of a hiring spree. Its shares fell nearly 7.9 percent.

And the Bank of America Corporation announced that its earnings and revenue fell in the first quarter compared with a year ago. The bank also announced a settlement that could reduce its liability for its part in issuing shoddy mortgages. Its shares were down 1.2 percent.

In Europe, the FTSE 100 in London was 0.54 percent higher, while the DAX in Germany rose 0.44 percent. The CAC-40 in Paris added 0.1 percent. Earlier in Asia, Hong Kong’s Hang Seng Index fell less than 0.1 percent to close at 24,008.07.

Despite the inflation figures, China’s Shanghai Composite Index staged a late rally to finish 0.3 percent higher at 3,050.53.

Japan’s Nikkei 225 stock average fell 0.7 percent to end at 9,591.52.

Benchmark oil for May delivery rose $1.83, to $109.94 a barrel in New York trading.

While inflation was relatively mild in the United States in March, other figures released Friday reinforced expectations that the European Central Bank and the People’s Bank of China will soon be raising interest rates to counter rising inflation.

In China, figures showed consumer prices rose 5.4 percent in the year to March, up from February’s 4.9 percent. The increase was largely driven by surging food costs and represents a setback for the government, which has lifted interest rates four times since October to cool prices.

Analysts expect the People’s Bank to enact further measures in the days to come in response to those figures.

They also think that the European bank will raise rates again in June after figures showed inflation in the 17-country euro zone revised up to 2.7 percent in the year to March from the preliminary estimate of 2.6 percent, largely because of rising fuel costs.

Investors also kept a watched on the sovereign debt situation in Europe.

Portugal avoided default on Friday as it scraped together 4.2 billion euros ($6.1 billion) for a bond redemption, but further depleted its meager cash reserves as it desperately awaits a bailout.

Lisbon is eight weeks away from possible bankruptcy. Officials admit they will not have enough money to settle a 7 billion euro debt falling due in mid-June and have asked for financial help amid a cash crunch that is threatening the provision of basic services.

The ailing country is weathering unsustainable costs on loans to finance its economy, with its 10-year bond yield reaching 8.9 percent Friday as markets shied away from investing their money in a country viewed as a risky bet.

Portugal’s European partners and the International Monetary Fund last week agreed to provide aid which could amount to 80 billion euros ($115 billion).

But negotiations on the terms of the loan, especially what interest rates Portugal will be obliged to pay on it, will probably take weeks.

There are also mounting concerns that Greece will be forced to restructure, though the prime minister, George Papandreou, insisted that Athens did not intend to do so. The country’s woes, he said, “will be addressed in depth. Not by restructuring the debt but when we restructure the country.”

Another credit rating downgrade of Ireland by Moody’s also stoked concerns that Europe’s debt crisis still has a way to play out.

Article source: