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Daily Agenda: The Spotlight Swings to the European Central Bank

Expectations rise for further ECB easing; China’s FX reserves outflows slow; Kuroda upbeat on QE despite looming tax hike; Softbank splits.

As a new week begins, investors await the looming Thursday announcement on further easing. European Central Bank President Mario Draghi faces a difficult balancing act as he manages expectations for further stimulus while grappling with limitations of monetary policy in the face of weakened global demand. If the bank chooses, as is widely expected, to further reduce the deposit rate and expand its quantitative-easing facility, the open question is how much of that stimulus will seep into the real economy versus the short-term impact on financial-asset valuations. So far, miniscule deposit and lending rates have not spurred as much flow of capital to the private sector as many had hoped. The most recent data on bank lending in the common-currency zone fell short of consensus forecasts for January, expanding by 1.4 percent versus the same month in the prior year, which was negative.

BIS says China’s capital flight due to dollar debt payments. Fresh data from the People’s Bank of China released this morning suggests that the pace at which capital is fleeing the world’s largest economy may be slowing. The $29 billion decline in foreign currency reserves brings outflows to their lowest level since June 2015. The news follows the release of a report Sunday by the Bank for International Settlements in Basel, Switzerland that concluded that persistent outflows of capital from China since 2014 were largely the result of companies paying down U.S. dollar-denominated debt in the face of appreciation of the U.S. dollar, rather than liquidation of assets to move capital offshore.

SoftBank to split into two separate companies. On Monday after markets closed in Japan, SoftBank Group Corp. announced it will formally separate into two publicly traded entities. One company will focus entirely on overseeing more than $80 billion in international investments in telecom and technology, including a significant holding in China-based Alibaba Group Holding. The new entity will also focus on increasing venture capital investments. The other company will contain SoftBank’s domestic Japanese telecom franchise.

German factory orders better than expected. Deutsche Bundesbank factory-order data for January released this morning contracted by 0.1 percent for the month, a 1.1 percent gain versus the same month in January. The figures are stronger than forecast with consensus estimates among economists ranging from a decline of 0.3 percent to minus 0.5 percent versus December. Of particular note, was a jump in export orders from within the common-currency zone, suggesting that industrial demand for the region may be rebounding.

Kuroda says tax hike is no cause for panic. In a speech on Monday before the Yomiuri International Economic Society in Tokyo, Bank of Japan Governor Haruhiko Kuroda presented an optimistic case for further policy action. The central bank head argued that there remains room for further quantitative-easing measures to be deployed if necessary and that “excessive appreciation of the yen has been corrected.” Critically, he also downplayed the potential impact of a sales-tax increase scheduled for April, stating that the economy is unlikely to suffer the setbacks triggered by the last hike in 2014.

Income tax overhaul in China. Among proposals put before the annual National People’s Congress in Beijing this week will be one from the Ministry of Finance that will increase tax deductions for households. The changes will include allowances for child and elder care as well as mortgage payments. The proposal is a move to encourage consumption by the middle class in China. Separately, and much- anticipated, the NPC meeting also included an announcement of reduced gross-domestic-product targets for 2016 to 6.5 percent versus 7 percent for 2015.

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