CPI: Tamer inflation, weaker growth could spur China to ease

China's government may have the leeway to unleash more stimulus after reports released Friday showed tamer inflation and slowing industrial production growth.

Inflation rose 3.4% year-over-year in April, the Chinese' government's National Bureau of Statistics reported. While that's far faster than inflation in the United States, it's down from a 3.6% rate in March.

It also comes as a slight relief to Chinese consumers, who as recently as last July were battling a whopping 6.5% annual inflation rate.

In a separate report Friday, the pace of industrial production growth slowed to 9.3% in April compared to a year earlier, down from an 11.9% growth rate in March.

Virtually all industrial sectors posted slower growth, including both light and heavy industry, state-owned enterprises and factories with funds from Hong Kong, Macao and Taiwan and foreign countriess.

Previously the top concern for Chinese officials, taming inflation has now taken a backseat to boosting economic growth. China's trade with foreign countries has recently slowed and its manufacturing sector has contracted. Overall economic growth decelerated in the first quarter.

Mark Williams, chief Asia economist for Capital Economics said that the slowdown in industrial production was particularly worrying because forecasts had been for the growth rate to rebound to 12.2%.

In a note to clients, Williams said the weaker growth in industrial production and lower inflation, coupled with other data showing a slowing in spending growth and lending in China, "drive several nails into hopes that China's economy has bottomed out."

This year, the People's Bank of China -- China's equivalent of the Federal Reserve -- has focused on freeing up credit by gradually injecting funds into the money supply and cutting reserve requirements for banks.

Chinese trade hits the brakes

Williams said the reports Friday show that the central bank will need to take additional steps.

"The April data suggest the current policy stance is not only failing to fuel stronger economic growth, it is not even creating looser credit conditions," he said.

Economists at HSBC predict that as long as inflation remains in check, the central bank is likely to step up its easing measures in the coming months, if not days.

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Demand for Fed's central bank swaps could rise

By Ellen Freilich

NEW YORK (Reuters) - The Federal Reserve's outstanding central bank liquidity swaps program has shrunk to its lowest level since early December, but if conditions in European unsecured bank funding markets deteriorate, demand for those swaps could rise.

According to the Fed's latest balance sheet update, outstanding dollar liquidity swaps fell to $32 billion in the week ended Wednesday.

But money market players are preparing for a new round of financial stress as concern over euro zone banks' exposure to Spanish and Italian government debt grows and borrowing costs for the two countries rise.

If conditions in European unsecured bank funding markets deteriorate as a result, demand for the Fed's dollar liquidity swaps may rise, said Barclays Capital market analyst Joseph Abate.

Data released Friday showed Spanish banks borrowed a record 316.3 billion euros from the European Central Bank in March because market funding was more expensive.

Italian banks also borrowed 270.1 billion euros, earlier data showed.

The Fed has coordinated with the European Central Bank to provide swap lines to offer dollar liquidity to European banks at times of stress in money markets.

As Spain tries to cut spending without plunging its economy deeper into recession, talk of "contagion risk" has revived and Spanish and Italian yields have been rising since mid-March.

Meanwhile, weekly demand at the ECB's one-week operations has ebbed as replacement demand for maturing operations fades.

Though the ECB's two massive three-year loan operations provided euro funding to the banks, confidence effects, along with reduced overall dollar and euro funding needs, have helped to reduce Libor since the start of the year, Abate said.

LIBOR'S NEXT DIRECTION

London Interbank Offered Rates (Libor) three-month dollar rates were fixed at 0.46615 percent versus 0.46665 percent on Thursday, the British Bankers' Association said.

The three-month dollar Libor/OIS spread stood at 31 basis points versus 32 basis points, according to Reuters data.

But what happens next for Libor depends on whether confidence effects start to wane, Abate said.

And that could happen if the market's focus shifts again to the fundamentals of European sovereign debt.

The upcoming short-term credit review of several European and U.S. banks with global capital markets businesses by Moody's credit rating agencies may not improve sentiment.

"Depending on the willingness of rated money market funds to lend to Tier 2 counterparties following a downgrade, demand for dollar funding through the Fed's central bank dollar liquidity swap program may increase," Abate said.

Meanwhile, recent high fed funds rate levels probably have more to do with the heaviness in repo than with the supply of bank reserves, he said.

"We expect collateral rates to decline this quarter as seasonal bill paydowns build," he added.

General collateral repo softened overnight, noted Roseanne Briggen, market analyst at IFR, a unit of Thomson Reuters.

"Some decent Treasury bill buying appears to be leading general collateral lower," she said.

But the softening in the general collateral rate might prove temporary as the $66 billion in Treasury coupons sold earlier this week settle on Monday, April 16.

(Additional reporting by Marius Zaharia in London; Editing by Andrew Hay)

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Express Scripts hearing could provide buying opportunity, says Leerink

Futures Tick Up After String of LossesReuters

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Obama healthcare law could sharply worsen U.S. deficits: study

WASHINGTON (Reuters) - President Barack Obama's healthcare law could sharply exceed its cost-savings targets and add up to $530 billion to the federal budget deficit, a leading authority on U.S. government benefit programs said on Tuesday.

A study by Charles Blahous, a George Mason University research fellow and the Republican trustee for the Medicare and Social Security entitlement programs for the elderly, challenges the administration's contention that the 2010 law would better keep healthcare costs in line.

Known as the "Affordable Care Act," or "Obamacare," the measure to expand health insurance for millions of Americans is considered Obama's signature domestic policy achievement.

The Supreme Court is currently weighing whether Congress overstepped its authority to regulate commerce in approving the law. The justices heard arguments in the high-stakes case two weeks ago.

Republican presidential candidates have promised to repeal the law if one of them wins the White House in the November election. Conservatives denounce the standard as an unwarranted government intrusion.

A White House official could not immediately be reached for comment.

Obama and the Democrats believe the law will control skyrocketing costs and curtail government "red ink."

But Blahous, a former economic adviser in the George W. Bush White House, said in his research that the law is expected to boost net federal spending by more than $1.15 trillion and add between $340 billion and $530 billion to deficits between 2012-21.

"Relative to previous law, the (healthcare law) both exacerbates projected federal deficits and increases an already unsustainable federal commitment to health care spending," he concluded.

The analysis, first reported by the Washington Post late on Monday, also comes a month after the Congressional Budget Office (CBO) cut the estimated net cost of the healthcare law by $48 billion to $1.08 trillion through 2021.

(Reporting by John Crawley; Editing by Lisa Shumaker and Paul Simao)

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