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ECB Sticks With Negative Rates; Central Banks Mull Digital Currencies; Shadow Banks Come Into the Light
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Good day. Christine Lagarde suggested the European Central Bank isn’t about to follow Sweden’s lead and lift rates out of negative territory. A survey of central banks revealed growing interest in rolling out official cryptocurrencies. And nonbank financial institutions are leading the growth in cross-border lending.
Now on to today’s news and analysis.
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ECB Indicates Negative Rates Will Stay in Place for Some Time
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European Central Bank President Christine Lagarde addressing the media in Frankfurt on Jan. 23, 2020. PHOTO: Ralph Orlowski/Reuters
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European Central Bank President Christine Lagarde suggested on Thursday the bank isn’t ready to follow the lead of Sweden’s central bank, which moved in December to return interest rates to zero amid concerns about real-estate prices.
The ECB will only start raising its key rate, currently at minus 0.5%, once eurozone inflation “robustly” meets the bank’s target of just below 2%, Ms. Lagarde said. But that is unlikely to happen for several years, according to financial markets and the ECB’s own economic forecasts.
The ECB has left open the option of cutting interest rates further below zero if the economic outlook worsens, but the bank on Thursday slightly upgraded its outlook, suggesting some international risks had faded.
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Derby’s Take: Looming Treasury Bill Shortage Creates Problem for Fed
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The Federal Reserve may soon face conditions that make its technically driven balance-sheet effort look even more like the stimulus campaign that many already think it is. That is because the Fed may soon have to supplement buying Treasury bills with purchases of Treasury notes, as part of its continuing effort to bolster bank reserve levels to ensure it maintains firm control over short-term interest rates. Read more.
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Other Developments Around the World
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Negative Interest Rates a Necessity for Switzerland: SNB Chairman
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"We have to maintain a certain interest rate differential with interest rates abroad," Thomas Jordan, chairman of the governing board at the Swiss National Bank, said in an interview with CNBC in Davos.
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Mr. Jordan also said he expects a "slight improvement" for the global and European economies after a year in which the Swiss economy only grew 1% on the back of the eurozone's weakness. (Dow Jones Newswires)
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Central Banks Warm to Issuing Digital Currencies
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More than one-fifth of the world’s population could have access to digital money issued by central banks to pay for groceries and even homes in the next few years, as these institutions accelerate plans to issue cryptocurrencies.
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Analysis: Reserve Bank of Australia Could Be Done Cutting Rates
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Thanks in part to a declining unemployment rate, there is growing confidence that the stimulus introduced in 2019, including three interest-rate cuts, income-tax cuts and a fall in the Australian dollar, has given the economy renewed energy, WSJ's James Glynn writes.
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Mexico Consumer Prices Rise in First Half of January
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A 0.27% increase in Mexico’s consumer price index pushed the annual inflation rate above the Bank of Mexico’s 3% target. The central bank has cut interest rates four times since August and most economists expect another cut in February.
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Fed Repos Add $74.2 Billion, But Net Liquidity Declines Modestly
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The New York Fed intervened on Thursday with two temporary additions of liquidity, marking a small reduction in the overall amount of temporary liquidity it is adding to financial markets. The bank added cash to money markets with $44.15 billion in overnight repurchase agreements, or repos, and a $30 billion 14-day repo operation. But because of the expiration of past operations, the outstanding amount of short-term Fed liquidity injections fell by $10 billion to $176.1 billion.
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Shadow Banks Come Into the Light in Global Lending
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In cross-border credit, regular banks are out, and shadow banks, which include brokers, clearinghouses, funds, investment trusts and structured finance vehicles, are in—and our limited knowledge about how the latter will behave in a downturn is a reason for concern, the Journal's Mike Bird writes. According to Bank for International Settlements data released this week, nonbank financial institutions are leading the growth in cross-border lending, with cross-border banking claims in the third quarter up 17% from a year earlier, marking their fastest growth in at least six years, when records began.
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Financial Regulation Roundup
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Global Financial Watchdog Restores Vatican’s Active Membership
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Readmission to the Egmont Group, a Toronto-based network of more than 160 national financial-intelligence units around the world, is a boost to the Vatican’s financial credibility, which has suffered several blows in recent months.
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Wells Fargo Ex-CEO Banned from Banking Industry
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Former Wells Fargo & Co. chief executive John Stumpf has been barred from the banking industry and will pay $17.5 million over the company’s fake-account scandal in a settlement with the Office of the Comptroller of the Currency.
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U.K. Court Orders Russians to Pay $900 Million Over Bank Collapse
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Three former Russian bank owners were ordered by a London court to pay $900 million for siphoning money from and contributing to the collapse of lender National Bank Trust, which is now under the control of Russia’s central bank.
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FICO Changes Could Lower Credit Scores in U.S.
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Changes in how the most widely used credit score in the U.S. is calculated will likely make it harder for many Americans to get loans, with Fair Isaac Corp., the creator of FICO scores, soon starting to score consumers with rising debt levels and those who fall behind on loan payments more harshly. It will also flag certain consumers who sign up for personal loans, a category of unsecured debt that has surged in recent years.
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U.S. Blacklists Four Companies for Allegedly Supporting Iran
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The U.S. Treasury Department on Thursday blacklisted four foreign companies for allegedly supporting and facilitating Iran’s petrochemical and petroleum exports, among the latest efforts by Washington to ramp up pressure on Tehran.
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In 2018 and 2019 during the U.S.-China trade war, investors and policy makers embraced global manufacturing purchasing managers indexes as a leading barometer of economic health. The latest installment of the WSJ Glossary series explains how purchasing managers can offer an early look at the direction of the economy.
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5:30 a.m.: European Central Bank’s Lagarde speaks at global economic outlook session at World Economic Forum in Davos, Switzerland
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Europe’s economy remained a global weak spot as 2020 got under way, with its services sector losing momentum even as factories saw export orders begin to stabilize after a long and deep decline.
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The Conference Board Leading Economic Index declined 0.3% in December to 111.2 and its six-month growth rate turned slightly more negative in the last three months of 2019, but financial conditions and consumers’ outlook for the economy remain positive, which should support growth of about 2% in the early part of this year, the group said. (Dow Jones newswires)
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Manufacturing in the central U.S. was nearly flat this month compared with December, with companies in the sector reporting a modest increase in employment, according to the Federal Reserve Bank of Kansas City. (DJN)
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Fewer U.S. companies plan to hire this year, with 51% of 150 companies surveyed in December by outplacement-services firm Challenger Gray & Christmas saying they will add to their payrolls, compared with 55% polled at the end of 2018. (DJN)
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German Chancellor Angela Merkel said at the World Economic Forum she was hopeful the European Union would soon strike a trade deal with the U.S., but also pushed back against President Donald Trump's bilateral approach to resolving conflicts, endorsing instead multilateral agreements and international organizations. (DJN)
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