Date: December 19, 2018
Fed Seen Making Dovish Hike With 2019 Pause: Decision Day Guide
U.S. central bankers meeting in Washington are expected to raise interest rates a fourth time this year, brushing aside pressure from President Donald Trump, while signaling a slower approach to their gradual rate hike campaign in 2019. The Federal Open Market Committee is widely expected to raise the benchmark target for rates by a quarter point to 2.25 percent to 2.5 percent, the highest in a decade, at the conclusion of its two-day meeting on Wednesday. Its policy statement at 2 p.m. might alter or drop a commitment to further gradual hikes, while officials may tamp down their economic forecasts in light of tighter financial conditions. Investors are betting heavily on a move, according to pricing in interest rate futures. The FOMC has not delivered a rate surprise at one of its meetings in a decade, but an unexpected pause can’t be completely ruled out on Wednesday especially given the recent downdraft in stocks. Chairman Jerome Powell is scheduled to hold a press conference at 2:30 p.m. where he can expect to face questions about why the Fed disagreed with — or surprisingly caved in to — Trump, who attacked it on Monday and Tuesday via Twitter for even considering a rate hike despite low inflation. “They are sounding pretty patient and willing to slow the pace of hikes in 2019 so as not to make a policy mistake,” said Julia Coronado, founder and president of MacroPolicy Perspectives LLC. A hike will place rates at the lower edge of the 2.5 percent to 3.5 percent range officials have estimated as neutral — the level that neither accelerates nor slows down the economy. With the exact level uncertain, Powell has urged a cautious approach to making policy that he’s likened to walking in a darkened room full of furniture.
Italy Banks Get Some Relief as EU Budget Deal Lifts Shares
Italian banks, the most exposed to their own country’s debt in Europe, finally caught a break as a budget agreement that averted European sanctions against Italy boosted both shares and bonds. The accord over Italy’s 2019 spending plans sparked a sovereign bond rally that may improve the balance sheets of the lenders. The European Commission decided against recommending a disciplinary procedure after the country’s populist government promised to rein in its spending, officials said on Wednesday. Despite the rally, banks continue to hold a huge pile of state debt, meaning they will long be tied to the fortunes of political leaders who have frequently sparked market turmoil. Even after the recent bond rally, high yields will continue to put pressure on capital and inhibit lenders’ ability to access funding. “Lower government bond spreads are great news for Italian banks,” said Francesco Castelli, a portfolio manager at Banor Capital. “But banks need a spread well below the current 250 basis points to access to the funding market and mitigate its effect on capital buffers.” While the total amount of state debt held by Italian lenders has fluctuated in recent years, its share of total lending has soared and now stands at three times higher than the average for euro-area banks. As other institutions dumped Italian bonds this year, banks in Italy increased their holdings. UniCredit SpA and Intesa Sanpaolo SpA, Italy’s two largest banks, were up 3.6 percent and 3.9 percent respectively as of 1:44 p.m. Lenders represented the top four gainers on the benchmark FTSE MIB Index. Financial stocks are still down substantially since April, when the current government of the League and the Five Star Movement took over.
China and U.S. Talk on Trade Ahead of January Negotiations
China and the U.S. held vice-ministerial level talks on Wednesday to discuss the ongoing trade dispute as they move closer to meeting in January. The two sides spoke by phone according to China’s Ministry of Commerce, and have held several rounds of talks in recent weeks, Treasury Secretary Steven Mnuchin told Bloomberg on Tuesday in Washington. They plan to hold a formal, face-to-face meeting in January to negotiate a broader truce in their trade wars but are unlikely to meet in person before then, Mnuchin said. “We’re in the process of confirming the logistics of several meetings and we’re determined to make sure that we use the time wisely, to try to resolve this,” Mnuchin said. Both sides are now focused on trying “to document an agreement” by a March 1 deadline for their current tariffs truce to run out. “We expect there will be meetings in January,” he said. Previously the administration hadn’t been specific on the timing of talks. The two sides are planning to meet in January, according to Chinese officials with knowledge of the discussions who asked not to be named as the talks were private. China’s Ministry of Commerce didn’t respond to a faxed request for comment. Mnuchin said neither he nor President Donald Trump were aware of the arrest of a senior executive from Huawei Technologies Co. when they met with China’s Xi Jinping for dinner on Dec. 1, the same day that the company’s chief financial officer was arrested in Canada.