Date: July 30, 2018
Powell to Duck Trump Jabs and Let Economy Justify Fed Rate Pause
President Donald Trump is casting a long political shadow over this week’s meeting of the Federal Reserve. No increase in interest rates is expected when officials gather on Tuesday and Wednesday in Washington, according to pricing in federal funds futures and all but one of the 57 economists polled by Bloomberg. But it would be a mistake to link the pause in rate hikes to Trump’s recent complaints over the U.S. central bank’s plan to gradually raise borrowing costs, ditching two decades of White House tradition of avoiding public comment on policy out of respect for Fed independence. “Recent pressure from the president is having no impact on” how they respond to data, said Priya Misra, head of global rates strategy at TD Securities USA in New York. “Ultimately, they will do what is right for the economy.” Recent economic data have not urgently flagged the need for a rate hike following Fed moves in March and June. Furthermore, there’s no press conference scheduled after this meeting and the Fed has so far never acted at a gathering that wasn’t followed by a quarterly media briefing. Officials insist that every meeting is live, but investors aren’t swayed. Chairman Jerome Powell, who will hold a press conference after every meeting starting in January, will next address the media after the Federal Open Market Committee’s Sept. 25-26 gathering. Investors see a more than 80 percent likelihood of a third 2018 rate increase then, versus around 1 percent this week. His July 17-18 congressional testimony also didn’t signal that the economy was overheating or warranted an imminent hike. “The FOMC believes that — for now — the best way forward is to keep gradually raising the federal funds rate,” Powell, a Trump appointee, told lawmakers. Just a few days later, on July 19, Trump said in a CNBC interview that Powell “was a very good man” while adding he wasn’t “thrilled” that the Fed was raising rates. “I don’t like all this work that we are putting into the economy and then I see rates going up,” Trump added.
U.K. June Consumer Borrowing Holds Steady on Credit Cards
U.K. consumers maintained their appetite for debt in June as the Bank of England considers whether to raise interest rates for only the second time since 2007. Unsecured lending rose 8.8 percent from a year earlier, the same rate as in the previous two months, the U.K. central bank said on Monday. Consumers added 1.6 billion pounds ($2.1 billion) to their debts in June — above the average of the previous six months. Credit cards are accounting for an increasing share of consumer credit, outpacing personal loans, overdrafts and car finance, the BOE said. A report this month showed Britons are increasingly struggling with credit card debt, with a “significant increase” in defaults on credit card loans largely driving the gain in defaults across unsecured lending last quarter. Monday’s report showed that is proving no bar to further borrowing, with credit card lending increasing an annual 9.5 percent in June, compared to 8.5 percent growth in other loans. The BOE is widely expected to deliver a quarter-point rate hike on Thursday to keep a lid on inflation. That may start to damp demand for loans after a decade of rock-bottom interest rates since the financial crisis encouraged consumers to borrow. Consumers owed a record 213.2 billion pounds of unsecured debt in June, while separate figures published by the Office for National Statistics last week showed U.K. household spending exceeded incomes in 2017 for the first time in three decades. The BOE data also showed the mortgage market is also holding up, with the number of home-loan approvals ticking higher to 65,619 in June.
India Increasing Rates Now Would Be ‘Big Mistake,’ Mobius Says
India’s central bank will make a “big mistake” if it raises interest rates this week, according to veteran emerging markets investor Mark Mobius. His view goes against the crowd. Most economists in a Bloomberg News survey expect the Reserve Bank of India to raise the report rate by 25 basis points on Aug. 1, a second hike in eight weeks. The six-member monetary policy committee headed by Governor Urjit Patel began its discussions today. Headline inflation is at the highest level in five months and above the 4 percent midpoint of the central bank’s target band, while core inflation — which strips out food and fuel — has climbed above 6 percent. But Mobius said that various Indian states are facing problems and a cut in borrowing costs is what’s needed to boost investments. “I think they should lower interest rates in India, not raise them because you have many states with different economic situations all over the country,” Mobius, partner and co-founder of Mobius Capital Partners, said in an interview with Bloomberg TV in Hong Kong. “You got real differences in India. It would be a big mistake for them to raise.”
BOJ Steps In to Buy Bonds Again as Traders Don’t Heed Signal
The Bank of Japan offered to buy an unlimited amount of bonds for a third time in a week after the benchmark 10-year yield rose to an almost 18-month high ahead of the central bank’s policy decision on Tuesday. The offer, made at 0.1 percent for the five-to-10 year maturities, drew some 1.6 trillion yen ($14.4 billion) of bids which were all accepted, according to the central bank. The 10-year yield pared the day’s advance after the move was announced. Speculation the BOJ may make tweaks to its bond purchases and negative-interest-rate policy to limit their side effects has sent yields tripling in the past week, while also spurring a steepening in global debt markets. The central bank may allow a bigger trading range for 10-year yields, or consider adjusting its annual target to expand its balance sheet, according to analysts. “The biggest reason for this operation was the risk that the 10-year yield would rise significantly away from zero,” said Takenobu Nakashima, a quantitative strategist at Nomura Securities Co. in Tokyo. “The BOJ clearly wanted to send a message it will defend the 10-year target around zero percent.” The 10-year yield was half a basis point lower at 0.095 percent, compared with the 0.11 percent touched before the operation. That compares with a close of 0.03 percent on July 20. The yen was steady at 111.05 against the dollar as of 5:02 p.m. in Tokyo. The purchase on Monday was significantly larger than the 94 billion yen bought in a similar operation on Friday, as prevailing bond prices were below where the BOJ was buying, allow investors to take advantage of the spread. Any tweaks would be the first since the central bank announced yield-curve control in September 2016. Monday’s fixed-rate operation was the seventh since the policy was introduced, and the first time it has conducted three operations within a single week. “The BOJ faces an extremely difficult situation,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “At this meeting, it may just suggest that the rate used for unlimited bond buying isn’t fixed, as indicated by Friday’s market operation. This is just an area of adjustment in implementation, not the policy itself.” The fixed rate of 0.10 percent for the operations on Friday and Monday was lower than the 0.11 percent offered at four previous operations for the five-to-10 year maturities.