Powell Brushes Aside Rate-Cut Pressure With Confidence on Prices
Federal Reserve Chairman Jerome Powell pushed back against pressure for interest-rate cuts from traders and President Donald Trump, saying inflation will rebound and the economy will stay healthy without fresh help from the central bank. “We don’t see a strong case for moving in either direction,” Powell told a press conference Wednesday after officials left their main rate unchanged. “The economy continues on a healthy path, and the Committee believes that the current stance of policy is appropriate.” U.S. stocks fell and the dollar advanced as investors pared bets that the Fed’s next move would be a rate cut. Treasuries ended the day little changed after gyrating after the release of the statement and during the briefing. Trump has repeatedly attacked Powell and his colleagues and suggested they cut rates by a full point in a tweet on Tuesday, hours after they began their two-day meeting. Traders are also in disagreement with the central bank and have priced in a so-called insurance cut that they see as necessary to get inflation back to the central bank’s 2 percent target. Powell has “seized the narrative back from the financial markets,’’ said Priya Misra, head of global rates strategy at TD Securities. “His message was growth is better and low inflation is transitory.’’ The chairman, Trump’s pick for the job, played down the threat of weak inflation by repeatedly noting it may be due to “transitory” factors. He added that neither the economy nor financial markets appear poised to boil over. “We don’t see any evidence at all of overheating,” Powell said. The Federal Open Market Committee’s statement repeated that it would be “patient” as it weighs future rate moves. The unanimous 10-0 decision left the target range for the benchmark federal funds rate at 2.25 percent to 2.5 percent. Expectations of rate cuts slipped, with around 5 basis points worth shaved from pricing for year-end, relative to the start of the day. Traders now see a full quarter-point of easing by the end of the first quarter of 2020. Overnight swaps had earlier reflected wagers that that would happen in December. “The market has been over-discounting the possibility of Fed cuts at the end of the year,” said David Leduc, active fixed income CIO for Mellon Investments Corp. “The market was a little disappointed.”
Euro-Area Factory Slump Eases in April as Italy Exceeds Estimate
The euro area’s manufacturing slump showed tentative improvement in April as Italy’s contraction slowed markedly and French industry stopped shrinking. A Purchasing Managers’ Index came in at 47.9 in April, up from March and a touch above both economists’ estimates and a previous reading for the month. It was still below the 50 level that would indicate expansion. The euro rallied as the report from Italian purchasing managers exceeded estimates amid improvement in new export orders and hiring. Industry there is still shrinking though, and the gauge for factory output for the 19-nation region is signaling contraction at a quarterly rate of 1 percent, a major drag on an economy increasingly sustained by services. “It remains too early to call a turning point,” said Chris Williamson, an economist at IHS Markit. This suggests “that the manufacturing downturn will persist in the coming months.” Expectations that the euro-area economy can weather its factory slump were boosted earlier this week when a report showed the region grew by stronger-than-expected 0.4 percent in the first quarter, supported by strong investment in Spain and buoyant consumer spending in France. The European Central Bank has pinned its hopes on the economy recovering in the second half of the year. Policy makers have indicated that updated forecasts in June will be key in determining the generosity of their new bank-lending program. While new orders staged another sharp decline in April, there were also some encouraging signs. Manufacturers maintained their optimism that output growth will rebound in the next 12 months. Gauges of activity rose in all of the euro zone’s four biggest economies, even though the levels remained largely disappointing. With Germany leading the slowdown and manufacturing also contracting in Italy and Austria, euro-area companies saw the biggest drop in backlogs of work in more than six years — a development that may prompt companies to start cutting costs and become more cautious in hiring.
Hong Kong’s Economy Grew Slower Than Expected in First Quarter
Hong Kong’s economy expanded at the weakest pace since the aftermath of the global financial crisis a decade ago, as a fragile global outlook and the U.S.-China trade war dampened activity. First-quarter gross domestic product grew 0.5 percent compared with a year ago, after a revised expansion of 1.2 percent in the final period of 2018, according to advance estimates in a government announcement. That was below all but one economist forecast. On the quarter though, growth surprised to the upside, accelerating to 1.2 percent. The data underline the impact that the trade standoff and the slowdown in China’s economy has had on its neighbors, with the trade-dependent territory facing weaker exports and worse business sentiment. That said, signs that the mainland’s performance has stabilized may buoy expectations, and sustained tourism receipts continue to provide support. “Total exports of goods weakened further in the first quarter, similar to the situations in many other Asian economies,” according to the government statement. “The modest year-on-year growth in the first quarter also reflected the high base of comparison in the same quarter of last year.” Hong Kong’s economy is forecast to slow this year, to growth of between 2 percent and 3 percent, as the city grapples with trade tensions and weaker property values, Hong Kong Financial Secretary Paul Chan said in his latest budget unveiled in February. Recent data have been mixed: March exports and imports fell less than expected while the trade deficit of HK$59.2 billion ($7.55 billion) was wider than forecast; February’s retail sales figures miss was blamed on distortions due to the timing of the Lunar New Year Holiday. Property prices are recovering after a 10 percent slide from August through January, with the Centaline Property Centa-City Leading Index rallying 7.8 percent on an 11-week streak since February. The stock benchmark Hang Seng Index has struggled to stay above the psychological 30,000 level since returning to a bull market, as short sellers return. “Despite the recovery in the stock and property markets, consumer spending has been cautious given global headwinds,” said Tommy Wu at Oxford Economics Ltd in Hong Kong. That’s “reflected in soft retail sales performance in recent months which was dragged by domestic demand despite a recovery in inbound tourism.”
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