Date: January 31, 2019
United States:
Fed Adopts ‘Patient’ Rate Stance With Balance-Sheet Flexibility
The Federal Reserve signaled it’s done raising interest rates for at least a while and will be flexible in reducing its bond holdings, a sweeping pivot from its bias toward tighter monetary policy just last month. U.S. stocks rallied, Treasury yields fell and the dollar sank as investors digested the new message from the central bank, which marked a broader shift toward sustaining the expansion — rather than preventing any overheating — and follows months of criticism from President Donald Trump for raising rates too much. The Federal Open Market Committee “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” the central bank said in a statement Wednesday following a two-day meeting in Washington, opening the door for the next move to also be a cut. In a separate special statement, the Fed said it’s “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.” “It’s hard to read this as anything other than the Fed has capitulated to the market,” said Michael Gapen, chief U.S. economist at Barclays Plc. “The market will read this as they’re done with the hiking cycle and that a halting in the balance sheet runoff is more likely than another rate hike.” Chairman Jerome Powell told reporters that while the U.S. economy was in a good place, slowing growth in China and Europe, Brexit, trade negotiations and the effects of the five-week U.S. government shutdown had sent conflicting signals on the outlook. “At such times, common-sense risk management suggests patiently awaiting greater clarity, an approach that has served policy makers well in the past,” he said. Asked if the Fed still had a bias toward hiking rates, Powell said, “I would want to see a need for further rate increases, and for me, a big part of that would be inflation. It wouldn’t be the only thing, but it would certainly be important.”
Europe:
Italy Falls Into Recession as Output Shrinks
Italy fell into recession at the end of 2018, capping a year of political turmoil, higher borrowing costs and fiscal tensions that took their toll on the economy. Output shrank 0.2 percent in the three months through December, following a 0.1 percent decline in the previous quarter, statistics agency Istat said Thursday. That was more than expected, and will put further pressure on the coalition government, which already appears to be fraying. The contraction was anticipated, particularly after Premier Giuseppe Conte said Wednesday that he expected the fourth-quarter GDP drop. Separate figures showed the euro-zone economy grew 0.2 percent at the end of 2018, matching the pace of the previous quarter, but slower than the first half. Market reaction to confirmation of the Italian recession was limited. The spread between Italian 10-year bond yields and those of similarly dated German bunds stayed at 240 basis points. The country’s benchmark FTSE MIB index erased earlier gains and was down 0.4 percent. The euro was little changed against the dollar at $1.1477 as of 11:43 a.m. in Rome. Investors have been warily watching Italy’s economic performance following months of negotiations with the European Union over the government’s budget that pushed up bond yields. While the recession may prove short-lived, the latest bad news is likely to test market confidence in the government’s expansive program for 2019. “The growth forecasts on which the budget was based have already been blown out of the water and euro-zone growth continues to weaken,” said James Athey, a portfolio manager at Aberdeen Standard Investments in London. “Italy is going to have to face up to some real problems.”
Asia:
U.S. and China Are Talking Some More, But Deal Prospects Are Still Slim
The U.S. and China are sitting down Wednesday for the first of two days of high-level talks aimed at finding a solution to a trade war that’s casting a growing shadow on both of the world’s two largest economies. But don’t hold your breath for a deal. Treasury Secretary Steven Mnuchin, who remains the most prominent advocate of a deal in the Trump administration, on Tuesday told the Fox Business Network he expected “significant progress” in this week’s talks. Administration officials and other people familiar with the state of play, however, say the two sides remain far apart on key issues, with the U.S. side still engaged in an internal debate over how to proceed and ill-prepared for this week’s meetings. The U.S.’s unveiling this week of criminal charges against Chinese corporate giant Huawei Technologies Co. isn’t helping the mood. The two days of talks between delegations led by Xi Jinping’s top economic emissary, Liu He, and President Donald Trump’s trade tsar, Robert Lighthizer, are the highest-level negotiations since the two leaders sat down for dinner Dec. 1. They come in the wake of lower-level talks this month in Beijing and after a period of market turmoil that has left both governments eager to publicly claim progress to calm investors’ nerves. Preparations for the talks are ongoing, People’s Bank of China Governor Yi Gang said at his hotel in Washington before the trade talks began on Wednesday morning. Later, Liu and Yi were seen entering the White House complex for the start of the negotiations. In a sign of the importance the White House is placing on the talks, Trump is expected to meet Liu while he’s in Washington. In addition to U.S. demands for structural reforms in China’s economic policy and key concessions on issues such as intellectual property, the latest round of talks will cover Beijing’s pledge to buy more American goods. China has also revealed how critical the talks are, with lawmakers fast-tracking approval of a law that would ban forced technology transfers and protect the intellectual property of foreign investors. The National People’s Congress, China’s top legislative body, will review the Foreign Investment Law at its annual meeting starting March 5, according to a statement from the NPC Standing Committee. Lighthizer’s office didn’t immediately respond to an emailed request for comment on Tuesday. People familiar with the U.S.’s internal discussions, however, say Trump appears to want to strike a deal.