Date: January 03, 2019
Powell and Trump Are Locked in a Battle for Wall Street’s Trust
Jerome Powell has been sucked into a one-sided communication fight with Donald Trump, who blames the Federal Reserve chairman for losses in the stock market. Powell can’t match the president’s megaphone on social media. But he can try to prevent equity prices becoming the barometer of Fed success by reminding the public that Congress gave it a different mandate: stable prices, and jobs for as many Americans as possible. Trump’s Twitter feed is “drowning out the message that the economy is doing well with low inflation and record low unemployment,’’ said Sarah Binder, a senior fellow at the Brookings Institution in Washington. Since Oct. 3, U.S. equity prices have plunged almost 15 percent, and Trump has put the blame squarely on the Fed. He tweeted on Dec. 18 that central bankers needed to “feel the market’’ and hold off from hiking — one day before they raised rates. Bloomberg News reported Dec. 21 that the president had discussed firing Powell. The Fed chief has a chance to snatch the initiative back with public appearances on Friday in Atlanta and Jan. 10 in Washington. “The burden is on him to come back and say, we are taking everything into account and we are also doing it independently,’’ Diane Swonk, chief economist at Grant Thornton LLP in Chicago. “There is no easy answer here,’’ she said, because the Fed can’t be entirely separated from the causes of stock market volatility. While investors had expected last month’s rate increase, which showed Powell was willing to defy the president, they were alarmed by projections for two more hikes in 2019. The S&P 500 index fell more than 5 percent from Dec. 19-21. Stocks may have been over-valued relative to a forecast for moderating U.S. and global growth in 2019. Domestic stimulus engineered by Trump in early 2018 will fade in the coming quarters. China and the eurozone both show signs of slowing. The economic outlook could deteriorate further amid Trump’s trade dispute with China and the threat of a disorderly U.K. exit from the European Union.
Turkey’s Central Bank Moves Early to Boost Treasury Buffer
Turkey’s central bank scheduled an extraordinary board meeting for earlier than usual to share its profit, a move likely designed to shore up the Treasury’s cash reserves. The nation’s fiscal authority — which holds a majority stake in the central bank and collects profits in the form of taxes and dividends — raised about 10 percent less than targeted in lira funding last year as it sought to keep a lid on borrowing costs before local elections in March. While the central bank’s board typically convenes each April, this year’s first meeting is planned for Jan. 18 and will discuss an advance payment from its 2018 profit, according to the agenda. The Treasury faces its biggest monthly financing needs since 2011 in February, and an earlier-than-expected cash injection would allow it to continue to curb bond supply and shore up the battered market. “The idea seems to be to avoid borrowing larger amounts from the market ahead of elections,” said Inan Demir, an economist at Nomura Plc. in London. Bonds gained after the announcement, pushing the yield on two-year government debt down 25 basis points to 19.6 percent, the lowest since July. Yields have dropped more than 850 basis points from a high in August. The Treasury has penciled in 21.8 billion liras ($4 billion) of borrowing in February, the most since January 2011. Income from the regulator has boosted Turkey’s budget in the last few years and provided crucial revenue for authorities as they tried to maintain fiscal discipline. Earlier this year, the central bank sent more than 70 percent of its 2017 profit of around 21.5 billion liras to the Treasury, according to its most recent annual report. The Turkish central bank is a joint stock company where the Treasury holds more than 55 percent of all the shares. But a legal cap on dividends has limited significant payouts to the estimated 6,300 shareholders. Unlike Switzerland and a few other countries where the central bank is publicly traded, Turkey has no market for these stocks. The invitation didn’t specify who called for the central bank’s extraordinary meeting, but management is required by law to convene the board if requested to do so by the majority of shareholders.
U.K. Treasury Adds Two Women to BOE’s Financial Policy Committee
Colette Bowe and Jayne-Anne Gadhia are set to join the Bank of England’s Financial Policy Committee, the U.K. Treasury said Thursday. The women will join the panel, tasked with ensuring financial stability, later this year. The central bank has been criticized for a lack of gender diversity, particularly in its most senior ranks and in policy making positions. Last year, members of a Parliament committee that scrutinizes the work of the Treasury and BOE said that they were concerned about a lack of diversity. Bowe is the current chairman of the Banking Standards Board. She has “led the way in developing and embedding better standards of conduct across the banking sector,” BOE Governor Mark Carney said in a statement. Gadhia was chief executive officer of Virgin Money until last year and also led the government’s review into equality and inclusion in financial services. She has “championed the transformative impact of adopting new technologies and of greater diversity,” Carney said. Five women and three men were shortlisted for the positions, the Treasury said. The new members will replace Richard Sharp and Martin Taylor, who are set to step down at the end of the first and second quarters of this year respectively. They will both serve three-year terms.
China Easing Expected as $625 Billion ‘Liquidity Hole’ Opens Up
China will cut the reserve requirement ratio and improve funding conditions this month, as liquidity tightens toward the Spring Festival holidays, the country’s largest securities firm says. Fresh demand for funds will amount to nearly 4.3 trillion yuan ($625 billion) in January, according to Citic Securities Co. and Bloomberg calculations. Mainland residents will withdraw 1 trillion yuan of cash in preparation for the holiday, when money is gifted in red envelopes. Corporate tax payments and maturities of lenders’ interbank debt will also mop up liquidity, prompting authorities to step up cash injections. “The People’s Bank of China will inject a significant amount of cheap funds to plug the liquidity hole,” said Ming Ming, Citic’s head of fixed-income research. Authorities will reduce the reserve requirement ratio and provide funding for lenders that make loans to private companies in January, he said. China cut the amount of cash banks need to set aside as reserves four times last year as the nation struggled with slower economic growth, record corporate bond defaults and a trade war with the U.S. The latest easing sign came Wednesday evening, when the PBOC adjusted a rule to boost the impact of previous RRR cuts. China International Capital Corp. said that may release as much as 400 billion yuan of liquidity. China’s interbank liquidity loosened this week after a seasonal squeeze at the end of the year, with the benchmark seven-day repurchase rate tumbling to the lowest level since August on Thursday. That helped fuel a rally in bonds: futures on sovereign notes due in a decade surged to the highest in more than two years. This month, mainland lenders will pay back 822 billion yuan of short-term debt borrowed from each other, and another 390 billion yuan to the PBOC for its medium-term lending facility, according to Bloomberg calculations. Factors such as corporate tax payments will drain 1.2 trillion yuan, Citic said. The PBOC will probably inject cash by conducting “sizable” reserve repurchase agreements with banks and lower the RRR in January, according to a note from Huachuang Securities Co. Some 4.5 trillion to 5 trillion yuan of liquidity will be withdrawn before the Spring Festival, analysts led by Ji Linghao wrote.