Date: September 26, 2018
Fed Dots to Harden Views for December Move: Decision-Day Guide
The Federal Reserve is poised to increase interest rates for a third time this year as it publishes forecasts that are expected to bolster expectations for another move in December and a continued pace of gradual tightening in 2019. The Federal Open Market Committee is almost certain to raise rates a quarter point at the end of its two-day meeting Wednesday to a target range of 2 percent to 2.25 percent — the highest level in more than a decade. The Fed will release its decision, policy statement and projections at 2 p.m. Chairman Jerome Powell holds a press conference 30 minutes later to discuss the outlook and can expect questions about political pressure after criticism from President Donald Trump. “Some of the more dovish dots are likely to drift a bit higher, cementing the likelihood of a December hike,” said Sam Bullard, senior economist with Wells Fargo Securities in Charlotte, North Carolina. “There is a growing consensus for further gradual tightening given the strong incoming data we have seen. They will feel confident about the rate projection.” In June, the FOMC was nearly evenly divided, with eight participants favoring at least four hikes this year, while seven favored three or fewer moves. The balance is likely to become more lopsided this week. In addition, new Vice Chairman Richard Clarida will submit his view at the meeting after being confirmed by the Senate in August. That will up the number of dots submitted to 16. Chicago Fed President Charles Evans, who has been among the more dovish Fed officials over the last decade, said on Sept. 14 “the data have been strong so I would not be surprised if it is four increases this year.” He said at the time that he hadn’t finalized his own forecast. Governor Lael Brainard, who had also been a reliable dove but has recently sounded more hawkish, in September said the short-term neutral rate — a rate that neither stimulates or restricts growth — might have moved up with stronger growth. The FOMC in June forecast rates in 2020 at 3.4 percent, which Brainard pointed out was higher than the median long-term neutral estimate of 2.9 percent. “You could well see some forecasts for 2019 and 2020 move up,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “It will be interesting to see how much the Lael Brainard view has permeated the governors, and that the neutral rate is moving up.”
ECB Takes Next Tapering Step With Credit Markets in Rude Health
The European Central Bank has taken another step toward the final wind-down of its 2.5 trillion-euro ($2.9 trillion) asset purchase program. Credit markets barely flickered, with another rush of bonds set to price on Wednesday. The bank only bid for 10 percent of a Deutsche Kreditbank AG covered bond sold on Tuesday, after previously getting about 20 percent of all euro covered deals since March, according to analysts at ABN Amro Group NV. The 500 million-euro note will likely be the first covered deal to settle in October, when the ECB will halve its purchase program before ending fresh stimulus in December. The ECB has “adjusted the standard primary market bid size” for covered bonds, according to an emailed statement from a spokesman. This was done to “keep a balance between the primary and secondary market presence in light of the lower APP purchase pace in the fourth quarter of 2018,” he said. Credit markets have broadly weathered the looming end of quantitative easing, helped by the ECB signposting its plans, pledging to reinvest maturing assets and promising to hold down borrowing costs well into next year. It has also cooled asset purchases including slowing the 250 billion euro-plus covered bond program and adding less than 1 billion euros of corporate notes in each of the past three weeks in spite of an issuance surge. The ECB has done a “good job so far” in managing the stimulus wind-down, said Jeroen van den Broek, head of debt strategy and research at ING Groep NV. Still, “the market is waiting for detail on refinancings and life after QE,” he said. Central banks and official institutions acquired just 12 percent of the Deutsche Kreditbank covered bond, according to a person familiar with the matter, who is not authorized to speak publicly and asked not to be identified. By comparison, central banks bought 30 percent of a covered bond issued by Hypo Vorarlberg Bank AG in July.
China to Cut Tariffs on Imports Including Machinery, Textiles
China will cut import tariffs on goods including machinery, paper, textiles and construction materials from Nov. 1, in a move that would lower costs for consumers and companies as a trade war with the U.S. deepens. The decision will lower tariffs for 1,585 products, state radio reported, citing a meeting of the State Council. The combination of these and other tariff cuts this year will lower the tax burden on consumers and companies by about 60 billion yuan ($8.7 billion), the radio reported. The Chinese government has yet to detail how the general tariff cut will apply to U.S. goods affected by retaliatory tariffs in the trade war. In theory the same goods can receive a lower basic tariff and still have extra duties piled on by the response to President Donald Trump’s measures. Whether goods affected by the trade war receive this treatment will depend on precisely which items the government selects to cut duties on. The Chinese government hasn’t released that list of the specific goods yet. The average import tax for some machinery will be reduced to 8.8 percent from 12.2 percent, for textiles and construction materials to 8.4 percent from 11.5 percent, and for paper and some other products to 5.4 percent from 6.6 percent, the radio station reported. The decision was aimed at meeting the demand of companies to upgrade production and lower costs, and to help fulfill the public’s diversified consumption appetite, according to a statement. It follows on from similar moves earlier this year which were aimed at reducing prices of imports to stimulate consumption and is in line with China’s pledge to boost imports. Wednesday’s decision will lower the average most-favored nation tariff rate to 7.5 percent from 9.8 percent. China still has a higher average tariff rate than many developed economies. The U.S.’ average applied MFN rate was 3.4 percent in 2017, and in general the Trump administration has accused China of being a protectionist economy.