U.S.:
Fed’s Williams Says 2.5% Funds Rate About the `New Normal’
Federal Reserve Bank of San Francisco President John Williams said he expects “gradual rate increases” over the next couple of years, with one possibly as early as December. “The pace at which that happens and exactly the contour of that will depend on how the economy progresses,” Williams told reporters Friday in Zurich. “My own view is that 2.5 percent is about the new normal” for the Federal Funds rate. The U.S. central bank announced plans earlier this week to begin slowly shrinking its $4.5 trillion balance sheet in October and published forecasts showing that officials still expect to raise interest rates for a third time in 2017, with three more quarter-point hikes pencilled in next year. “Although I do expect us to need to raise rates gradually over the next couple of years, it’s not like we need to raise rates a lot over the next couple of years,” Williams said, adding that the pace “will depend on how the economy progresses.” Williams said that in the event the U.S. economy under-performs significantly, the Fed’s first move “would be to cut interest rates and hopefully articulate clearly our views on why we’re cutting interest rates and how long we expect to keep them low.”
Asia:
S&P says downgraded China as credit growth still too fast
China’s attempts to reduce risks from its rapid build-up in debt are not working as quickly as expected and credit growth is still too fast, S&P Global Ratings said on Friday, a day after it downgraded the country’s sovereign credit rating. While S&P warned in June that a cut may be on the cards, it said it decided to make the call after concluding that China’s “de-risking” drive that started early this year was having less of an impact on credit growth than initially expected. “Despite the fact that the government has shown greater resolve to implement the deleveraging policy, we continue to see overall credit in the corporate sector to stay at a 9 percent point,” Kim Eng Tan, an S&P senior director of sovereign ratings, said in a conference call to discuss the one-notch downgrade to A+ from AA-. “We’ve now come to the conclusion that while we do expect some deleveraging in the next few years, this is likely to be much more gradual than we thought could have been the case early this year.” China’s finance ministry said the downgrade was “a wrong decision” that ignored the economic fundamentals and development potential of the world’s second-largest economy. “China is able to maintain the stability of it
Europe:
German bond yields steady below seven-week highs as election test nears
German 10-year bond yields steadied just below 0.5 percent on Friday, ahead of national elections this weekend that are set to return Angela Merkel to office as head of Europe’s biggest economy. Compared with France’s elections earlier this year, Sunday’s vote in Germany has passed largely unremarked by the market. Merkel has been chancellor since 2005 and her re-election is seen bring continuity and stability, although there is uncertainty about the composition of a likely coalition and some concern about the strength of the far right. Commerzbank analyst Michael Leister said investors would probably use Friday’s trading session to “fine-tune” positioning ahead of the election, while expectations of another coalition government between major parties could tighten German bond yield spreads against lower-rated southern European peers. Merkel’s conservative alliance currently governs in a ‘grand coalition’ with the center-left Social Democratic Party.
