Date: December 18, 2018
United States:
Trump Warns Fed Not to Make ‘Mistake’ Ahead of Likely Rate Hike
President Donald Trump issued a fresh appeal to the Federal Reserve to avoid making “yet another mistake” just hours before the U.S. central bank starts a two-day meeting at which it’s widely expected to raise interest rates. “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake,” Trump tweeted on Tuesday. “Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!” In a piece Tuesday titled “Time for a Fed Pause,” the Journal urged the Federal Open Market Committee to forgo a rate hike amid a lack of inflation and a possible slowing in U.S. economic growth. The Dow Jones Industrial Average of stocks fell more than 500 points on Monday and is down 12 percent since early October. Trump’s “50 B’s” may refer to the Fed’s current policy of reducing its bond holdings by a maximum of $50 billion per month. At a critical juncture in the Fed’s effort to prevent the economy from overheating, Trump is presenting the biggest presidential challenge to U.S. central bank independence in decades. While there may be an economic case for Chairman Jerome Powell to hold off on the ninth rate hike since December 2015, a larger threat may be eroding the Fed’s inflation-fighting credibility by appearing to cave to Trump’s demands. “The FOMC would be justified in pausing at this meeting given tighter financial conditions and global growth risks, especially with core inflation still below their objective,” BNP Paribas Asset Management Senior Economist Steven Friedman said in an email. “But pressure from the White House makes it harder for the committee to consider this option.”
Europe:
U.K. Retail Malaise Pressures Bonds Amid Holiday Shopping Season
Bonds of U.K. retailers extended declines on Tuesday as the industry’s crisis deepens in the run-up to the Christmas holiday. New Look Retail Group Ltd.’s 700 million pounds ($886 million) of notes due in July 2022 fell for a 16th day to about 46 pence, the lowest in six months, according to data compiled by Bloomberg. The British fashion chain is reducing the number of stores and pulling out of China as part of a strategic review of its international markets. Debenhams Plc’s 200 million pounds of bonds due in July 2021 were little changed at a record low of 63 pence after declining the most on Monday among notes in Bank of America Merrill Lynch’s sterling high-yield index. Matalan Ltd.’s 130 million pounds of six-year bonds sold in January hovered near a record-low of 81 pence, while Shop Direct’s 550 million pounds of securities due in November 2022 slipped 0.4 pence on the pound to a six month-low of 81.5 pence, the data show.
Asia:
China Sees Bankruptcies Surge; Bondholders May Get Less Back
China’s effort to cut the burden of insolvent companies weighing on its slowing economy has kicked into higher gear, with a slew of bankruptcy filings that’s set to enrich the case history of debt resolutions for bond investors. Local courts have accepted or plan to accept at least five bankruptcy applications from firms that defaulted on publicly issued bonds since early November. That’s roughly on par with the number seen over the previous four years. The new pace may continue: China’s top planning body called on Dec. 4 for local officials to clean up the debt of firms with excess production capacity or insolvent balance sheets by 2020. The bad news is that some bondholders may find they’re going to get less back from defaulted issuers than they anticipated. The good news: there’s likely to be swifter resolution once court procedures take over from ad-hoc work-out negotiations. And the process will give both creditors and debtors the chance to gain experience in restructuring obligations, little more than four years after China began embracing the concept of defaults in the world’s third-largest bond market. “Bondholders could face considerable losses after bankruptcy proceedings, but what is more important is that they can learn how to fight for their rights via the legal system, and how to choose among debt proposals,” said Ivan Chung, an associate managing director at Moody’s Investors Service in Hong Kong.
