Graeme Wearden 

Stocks surge as Fed leaves US interest rates on hold and promises ‘patience’ – as it happened

Rolling coverage of the latest economic and financial news, as America’s central bank leaves interest rates on hold and strikes a dovish tone
  
  

Federal Reserve Chairman Jerome Powell
Federal Reserve Chairman Jerome Powell Photograph: Susan Walsh/AP

Stocks jump after Fed decision

And finally, the New York stock exchange has closed sharply higher after the Fed dropped its predictions for further interest rate hikes.

The Dow Jones industrial average jumped 434 points - its best day in a month - to end 1.7% higher at 25,014.

The wider S&P 500 index gained 1.5% while the tech-focused Nasdaq leapt over 2%.

Investors are also reacting to something else - Powell’s comments that the Fed will adjust the way it unwinds its quantitative-easing asset purchase schemes.

Jason Reed, assistant teaching professor of finance in the University of Notre Dame’s Mendoza College of Business, explains:

Stock markets strengthened on the news that the federal reserve will adjust their balance sheet normalization targets in light of economic and financial developments, a decision first outlined in their December meeting.

Although the Fed doesn’t see their balance sheet runoff as the cause of recent market turbulence, investors certainly did. The Fed now finds themselves in an interesting position, as many will feel today’s decision is catering to Wall Street and President Trump. It should be noted that the Fed’s guidance on halting rate hikes and balance sheet runoff has been consistent: the Fed’s decision are data dependent and further decisions will require patience and flexibility.”

And on that note, goodnight! GW

We have entered the realm of Powell’s Pause, says Robin Anderson, senior economist at Principal Global Investors.

Here’s her take on today’s Fed interest decision:

The Fed is stepping back from raising rates on autopilot and will likely continue to look at other metrics to inform Fed decisions, including inflation rates, U.S. market trajectory and global growth numbers.”

“What a difference a month makes. The market reacted swiftly and negatively to the Fed meeting in December. But today, we saw a much more dovish Fed, the Fed changed its language and shifted away from gradual increases to a position of patience.”

“The Fed is going to be truly data and market dependent now. If global growth improves and if the market once again rallies, we may see the Fed hike by year end. For now, I’d expect additional rate hikes to be on hold until at least mid-year.”

Nothing in Jerome Powell’s press conference dented the upbeat mood in the markets.

Investors are cheered that the Fed has pressed the pause button on its rate hike cycle, and wondering if the next move might be to rewind....

Fed chair: We'd suffer from a hard Brexit

Asked about Brexit, Jerome Powell says that the Fed is taking steps to ensure America’s financial system can cope with “a full range” of outcomes.

He also warns that a hard Brexit would have an impact on the US, especially if it caused financial turmoil.

Q: Have you just caved to President Trump?

All we care about is using our tools to help the American people, Powell replies in a particularly serious tone. We don’t get involved in politics.

We’re human, we make mistakes, but we don’t make mistakes of character or integrity.

Q: Have we reached the end of the US rate-hiking cycle, rather than simply pausing it?

Powell says we’ll only know in hindsight.

Powell: Shutdown will hurt US growth

Q: What’s changed since the Fed’s last meeting, just six weeks ago (when Powell was predicting gradual rate hikes)

Powell says recent data have shown that the slowdown in China and Europe has continued.

He also cites the US government shutdown, saying it will have “some impact on first-quarter US GDP”.

But if the shutdown row is now over, then much of that lost activity should be clawed back.

Updated

Q: Has the Fed considered changing the pace of unwinding its asset purchase scheme?

Powell insists that no decisions have been taken, but discussions are underway [the issue here is how large the Fed’s balance sheet should be in the long term]

Q: Your statement talks about adjustments, so might the next interest rate move be up, or down?

It depends entirely on the data, Powell says, adding that the ‘cross-currents’ facing America could be with us for a while.

Asked about economic risks (such as Brexit, and trade wars), chairman Powell says Fed officials believe the economic outlook is “still solid”.

Q: Are US interest rates now at neutral? (ie, neither stimulating nor holding back the economy?).

Powell says policy is ‘appropriate’, adding that the Fed funds rate is within the ‘range’ of neutral.

Powell says the case for further interest rate rises has ‘weakened somewhat’, as inflationary pressures have declined.

Powell: US economy strong, but cross-currents are building

Federal Reserve chair Jerome Powell is holding a press conference now.

Powell gives a recap of the Fed’s meeting.

He says the Fed’s mission is to “sustain the economic expansion with a strong jobs market and stable prices, for the benefit of the US people.”

The US economy is in a good place, and we’ll use our tools to keep it there, Powell pledges. He says the jobs markets looks strong, and inflation is close to target.

Looking ahead.... the Fed expects the US economy to do well in 2019, but not as fast as the very strong growth in 2018.

But growth has slowed in China and Europe, and there is uncertainty over Brexit, trade discussions, and the US government shutdown.

These ‘cross-currents’ could hurt the US economy. So the Fed has decided to be patient - basically, wait and see how conditions play out.

....and a buying opportunity.

Candice Bangsund, Vice President and Portfolio Manager at Fiera Capital, predicts the Fed will leave US interest rates unchanged until at least July.

We expect the Fed to take a pause and remain sidelined through the first half of the year in order to monitor the evolution of the macroeconomic landscape and recommence with two more rate hikes in the back half of the year.”

The Fed has turned cautious, says Nancy Curtin, chief investment officer at Close Brothers Asset Management:

“After taking a gradual approach to interest rates last year, the Fed has become more cautious still and moved back into wait-and-see mode. A slowdown in global growth and market volatility has caused some concern.

However, should trade negotiations with China and the outlook for growth improve, the combination could lead to a better second quarter for the economy, giving Powell more confidence to normalise monetary policy.

Here’s a neat summary of the Fed’s new message:

The dollar is weakening against other currencies - another sign that the markets believe the Fed is less likely to raise interest rates anytime soon.

Shares are rallying on Wall Street, as investors cheer the Fed’s pledge to be ‘patient’ before raising interest rates again.

The Dow Jones industrial average has jumped 422 points, or over 1.5%, to 25,018 points.

Updated

Significantly, the Fed has changed the language in its monetary policy statement - dropping its guidance that ‘further gradual’ rate rises will be needed.

Fed leaves interest rates on hold

Newsflash: The US Federal Reserve has voted to leave interest rates on hold today, at their current level of up to 2.5%.

And more significantly, the Fed has dialled back its predictions of future rate hikes in 2019.

Pointing to uncertainty over the US economy, the Fed said it would be ‘patient’ before raising interest rates again (following heavy pressure from President Trump).

The Fed says:

“In light of global economic and financial developments and muted inflation pressures, the committee will be patient [when determining future rate adjustments.”

After a mixed day for European stock markets, Britain’s FTSE 100 has closed 107 points higher at 6,941 - a gain of 1.6%.

France’s CAC also did well, gaining almost 1% after the French economy grew faster (+0.3%) in the last quarter.

Germany’s DAX lost 0.3%, though, while Spain’s IBEX shed 0.5%.

Fiona Cincotta, senior market analyst at City Index say:

Markets breathed a sigh of relief over Apple’s results and encouraging China related news, which overshadowed rekindled Brexit nerves.

As usual the multinationals on the FTSE, which also book revenue in dollars, were fairing well, whilst the more domestically focused firms lagged behind.

In New York, Apple’s shares have jumped almost 5% after the tech giant reported falling revenues and profits, but not as low as feared.

Updated

Over in Greece the ripple effects of the country’s successful bond sale yesterday – the first since Athens exited its final bailout program – continue to be felt today with yields on Greek bonds falling sharply.
Yields on five-year bonds struck a six-month low of 2.928% in what analysts were interpreting as further good news for prime minister Alexis Tsipras, as he basks in global praise for successfully ending the decades-long name row over Macedonia which had helped clear the way for Tuesday’s bond sale

French president Emmanual Macron was the latest to praise the accord – ratified by the Greek MPs last week – an an example of problem solving at its best for Europe.

Tsipras, however, has not been as loudly applauded for his decision Monday to push ahead with an 11% increase of the minimum wage. That move is believed to conflict with the debt-stricken country’s low productivity rates, and which could yet test the patience of creditors still monitoring Athens’ fiscal progress.

Full story: UK credit growth slows

Here’s our economics correspondent, Richard Partington, on today’s UK credit figures:

The boom in consumer borrowing across Britain has cooled to the slowest annual growth rate in four years, according to official figures, as households rein in their spending.

The Bank of England said annual consumer credit growth slowed to 6.6% in December, continuing a trend for weaker levels of household borrowing on credit cards, personal loans and car finance deals.

In a reflection of the slowdown in consumer spending over the key festive shopping period, the amount borrowed last month dipped to £700m, below the average £1bn per month for the previous six months.

The Bank said credit card borrowing was particularly weak, with only £100m put on plastic last month compared with an average of about £300m per month since July....

More here:

Fast food chain McDonalds has just beaten Wall Street forecasts, thanks to strong international growth (although the US market lagged behind).

McDonalds posted earnings per share of $1.97, beating forecasts of $1.89. Revenues were slightly ahead of estimates, at $5.163bn, with global like-for-like sales up 4.4%.

In the UK, McDonalds has posted more than 10 years of growth in a row (going back to the financial crisis).

Paul Pomroy, CEO of McDonald’s UK and Ireland said:

“2018 was a strong year for our business; together with our franchisees, we served over a billion customers, closed the year with a record-breaking month in December, and have now delivered 51 consecutive quarters of sales and guest count growth. We are pleased to be succeeding by continuing to listen and invest in what customers want: choice, value and convenience, and doing right by our people.

Perhaps surprisingly, coffee is now a huge area - with coffee drinkers the most frequent customers. A London-based barista trial is now being expanded to the Midlands...

Over in America, strong employment data suggests the government shutdown hasn’t caused immediate harm to the labor market.

213,000 new jobs were created by US companies this month, the latest ADP survey shows. That’s a solid figure, beating forecasts of 181,000.

It bodes well for Friday’s Non-Farm Payroll (covering public and private sector jobs).

But....the impact of leaving hundreds of thousands of Federal workers unpaid for weeks may not be fully felt for some time.

Stocks rally despite Brexit angst

Stocks continue to rally in London, despite this morning’s weak consumer credit figures, and the ongoing Brexit uncertainty.

The FTSE 100 index is now 105 points higher at 6939, extending yesterday’s rally.

Nearly ever company on the index is up, with exporters and miners continuing to get a boost from the pound’s slide last night.

Laith Khalaf, Senior Analyst at Hargreaves Lansdown, says retail investors have been shunning the London stock market since the 2016 EU referendum, taking £11bn from UK equity funds.

But perhaps now’s the time to buy?

As this chart shows, the yield (or return) on UK shares is the highest since the financial crisis.

Khalaf writes that investors should look to the long term:

While it’s difficult to envisage right now, the Brexit blues depressing the UK stock market will eventually pass. It may yet get worse before it gets better, but investors putting money in the market today should be considering the returns they will get out to 2029, not just in 2019.

In today’s unpredictable political environment, diversification is critical, so that whichever way the Brexit cookie crumbles, some of your portfolio is performing well. However huge sums have been withdrawn from UK equity funds since the EU referendum was announced, and hence some investors may now have little exposure to the UK stock market. That means turning down an attractive value opportunity for the long term, and even in the short term may mean they miss out if there’s an improvement in the Brexit outlook.’

Germany’s BGA trade body isn’t pulling its punches over Brexit, as we enter the final two months before exit day.

In a statement, BGA declared that the lack of a finalised deal means:

“The German and especially the British economies are heading for a huge disaster.”

I mentioned earlier that a cloud of gloom was covering the eurozone. Now, the latest consumer sentiment report shows that morale has dropped to a two-year low.

The EC’s economic sentiment index has dropped to 106.2 points in
January, the 7th monthly fall in a row - and the lowest level since November 2016.

Reuters has more details:

  • Sentiment in industry fell to 0.5 points in January from 2.3 in December, in line with market expectations.
  • The mood of consumers picked up to -7.9 after December’s steep fall to -8.3.
  • However, retail trade sentiment slipped to -1.9 points in January from -0.1 in December.
  • Sentiment in services, a sector which produces two thirds of the euro zone GDP, went down to 11.0 points, almost matching expectations of a 11.1 reading.

Economist Emanuele Canagrati of BP Prime says eurozone morale is “not good”.

Britain’s high streets are in enough trouble, without consumers snapping their credit cards (metaphorically speaking).

New analysis shows that the average town in England and Wales has lost 8% of its shops in the last five years, rising to 20% in Stoke and Blackpool.

Josie Dent, economist at the CEBR, says the slowdown in credit growth is due to nervous households struggling with “unsustainable levels of debt”, and unwilling or unable to take on any more.

She writes:

This month Cebr research with YouGov found that UK consumer confidence continued to decline in January, sinking to its lowest level since May 2013. This low level of confidence will be making many hesitant to borrow - as shown by the low rate of growth of credit card debt.

To make ends meet many households are instead cutting back expenditure, for which the struggling high street provides evidence, as many consumers have curbed spending on retail goods.

Dent also points to Tuesday’s data, showing a big jump in individuals falling into insolvency in 2018.

Economist Sam Tombs has spotted that UK consumer credit is now slowing at the fastest rate since the financial crisis:

In some ways, the slowdown in UK credit growth is welcome.

Back in 2017, the Bank of England was worried that consumer credit was booming at 10% growth per year. That could create a borrowing bubble that will burst when the economy stumbles.

Earlier this month, the TUC warned that Britain’s mountain of unsecured debt has hit a record high of £428bn, or £15,385 per household [however that includes student loans, which arguably should be treated as deferred income tax].

However, Britain’s stretched retailers will worry that consumers are cutting back, just as Brexit hits confidence.

The slowdown in credit growth can certainly be pinned on Brexit, says economist Howard Archer of the EY Item Club.

He believes borrowers and lenders have both become more cautious about the economic outlook, and Brexit uncertainty.

Archer writes:

  • The ongoing slowdown in net unsecured consumer credit growth to a 4-year low in December reinforces belief that heightened uncertainties focused on Brexit are likely to weigh down on the economy in the near term at least. Significantly, the latest Bank of England credit conditions survey showed lenders expect the demand for unsecured consumer credit to fall in the first quarter of 2019 at the fastest rate since records began in 2007.
  • Heightened concerns over Brexit and the economic outlook, the very low household savings ratio and the prospect of gradual interest rate rises over the coming months are likely to limit consumer willingness to borrow.
  • Meanwhile, lenders have become more careful about advancing unsecured credit - the fourth quarter of 2018 saw lenders further reduce the amount of unsecured credit available to households and again tighten lending standards.

Updated

UK consumer credit growth falls as Brexit loom

Newsflash: Lending to British consumers has slowed to its weakest growth since late 2014, as people cut back on credit cards.

Mortgage approvals have fallen too, in the latest sign that Brexit uncertainty is weighing on the economy.

New Bank of England data shows that annual growth in unsecured consumer lending dropped to 6.6% in December, down from 7.2% in November. That’s the smallest increase since December 2014.

The BoE says:

Annual consumer credit growth slowed to 6.6% in December, reflecting the continuation of relatively weak flows of new lending. The net monthly flow in December fell to £0.7 billion, reflecting less extra borrowing on credit cards.

Instead of hitting their credit cards, many families have been squirrelling away their spare cash. The Bank reports that UK households “significantly increased their deposits in interest-bearing instant access savings accounts in December”.

The BoE also reported that 63,793 mortgages were approved in December, down from 63,793 in November. That’s the lowest since April, suggesting the housing market is slowing (although December isn’t a bumper time for house sales, due to Christmas).

Chris Williamson of data firm Markit argues that the gilet jaunes protests have hurt the French economy, despite today’s solid growth report.

He points out that Markit’s Purchasing Managers Index reports show a sharp slowdown in the last couple of months. That may show up in future GDP reports.

Pound rises after Brexit vote wobble

Sterling is clawing back some of last night’s losses, as traders try to calculate the likely path of Brexit.

The pound has gained almost half a cent against US dollar to $1.311 this morning, suggesting the City isn’t panicking.

However, that’s almost a cent weaker than last night, just before parliament rejected Yvette Cooper MP’s amendment to block a no-deal Brexit.

Tyler Griffin, currency specialist at OFX, predicts more volatility in the next few weeks, especially as MP will have another vote in two weeks.

In the short term there will be major pressure on the pound, especially against the US Dollar. One more slip from Theresa May and we could see the pound hit the deck and fall back below 1.30 against the dollar.”

Economist Shaun Richards isn’t too impressed with France’s GDP figures (and fair enough - 0.3% growth is hardly sizzling)

The Yellow Vest protests forced French president Emmanuel Macron to announce a swathe of spending plans last month, including a higher minimum wage and tax breaks for pensioners and low income workers.

That package will cost €10bn, but may keep the economy on track in 2019.

Sabrina Khanniche of Pictet Asset Management tweets:

France’s stock market has risen this morning, as traders welcome today’s GDP figures.

The CAC 40 index of leading French companies has risen by 0.4%, outperforming Germany (down 0.2%).

In London, the FTSE 100 is pushing higher too thanks to the pound’s decline last night after the Brexit votes.

The Footsie has gained 50 points, led by exporters such as British American Tobacco and Burberry, and mining stock including Glencore and Fresnillo. Their overseas earnings become more valuable, in sterling terms, when the pound weakens.

Updated

CBI: Firms will step up no-deal planning

Back in the UK, businesses are increasingly nervous about Brexit after parliament voted to change Theresa May’s deal - despite the lack of appetite from Europe to reopen it.

Carolyn Fairbairn, the chief executive of the CBI business group, has expressed deep concern at last night’s Brexit votes, which saw MPs back the ‘Brady Amendment’ to change the Irish backstop.

Talking on BBC Radio 4’s Today programme this morning, she said no-deal has not been taken off the table.

She warned that many businesses, in particular manufacturers, insurers and small firms, were not ready for a hard, “cliff edge” Brexit on 29 March – although banks and other financial services firms certainly are prepared.

She said:

“The reaction of business today will be one of rising frustration and concern. The main objective that business has is to avoid no deal. Did yesterday do anything to move us further away from no deal? And I think the answer feels as though it is no.”

Asked about the non-binding amendment tabled by Labour’s Jack Dromey and the Conservative Caroline Spelman to rule out a no-deal outcome, Fairbairn said:

“It is welcome to see that there is a consensus against no deal… But it is not binding, it does nothing practically to take no deal off the table and it does feel like hope rather than strategy.

“I don’t think there will be a single business this morning who is stopping or halting their no deal planning as a result of what happened yesterday.

And I fear they may even be accelerating it, because the other [Brady] amendment feels like a real throw of the dice to be returning to renegotiate something that has been so difficult to negotiate. If the renegotiation goes ahead which it sounds as though it will let’s move very quickly so we know the outcome.”

She said some businesses were ready for a hard Brexit/no deal Brexit, but only 10% of small and medium-sized firms had drawn up contingency plans.

“There are some businesses who are ready. Financial services have been able to prepare a long time in advance and it hasn’t been comfortable and they spent a lot of money on it but they are broadly ready. The real areas of concern now are around manufacturing, other services, broadcasting actually insurance is still not in great shape, they are deeply concerned.

“We said before no deal is just not manageable at this stage.”

Updated

Given all the anxiety over trade wars, the 2.4% surge in French exports in the last quarter is a little surprising.

According to INSEE, France’s manufacturers racked up more “aeronautic and naval equipment deliveries” in the last quarter.

French GDP: What the experts say

Despite the impressive jump in exports, many City experts are concerned about weakness in the French economy.

Philippe Waechter, chief economist at Ostrum Asset Management, points out that French domestic demand has faltered:

Economist Christophe Barraud has spotted that French consumer spending - a key measure of domestic confidence - has dropped sharply.

Economics blogger Jeroen Blokland hopes that France’s economy may pick up in 2019

Introduction: French economy beats forecasts

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

With gloom gathering over Europe, France has given the eurozone a much-needed boost by beating growth forecasts for the last quarter.

French GDP expanded by 0.3% during October-December, new figures show, crushing fears that growth could have fallen to just 0.1%.

That matches France’s growth in the third-quarter, easing fears of a downturn.

Economists had been braced for bad numbers, following the ‘gilet jaunes’ protests that have gripped Paris for many weeks, with mass demonstrations, running battles with police, roadblocks and attacks on shops and cars

And indeed, consumer spending and investing did drop in the last quarter.

But France’s economy still pushed on, the INSEE stats office reports, thanks to a jump in exports.

INSEE reports:

Household consumption expenditures decelerated (0.0% after +0.4%), likewise total gross fixed capital formation slowed down (GFCF: +0.2% after +1.0%). Overall, final domestic demand excluding inventory changes decelerated: it contributed 0.1 points to GDP growth, after 0.5 points in the previous quarter.

Imports bounced back in Q4 (+1.6% after −0.7%) and exports accelerated significantly (+2.4% after +0.2%). All in all, foreign trade balance contributed positively to GDP growth again: +0.2 points, after +0.3 points in Q3. Conversely, changes in inventories contributed negatively to GDP growth (−0.1 points after −0.5 points).

The figures aren’t exactly superbe -- France’s annual growth rate has dropped to 1.5% for 2018, from 2.3% in 2017. That highlight how the ‘euroboom’ has fizzled out.

Reaction to follow....

Also coming up today

US and China are due to resume their trade talks today; overshadowed by the criminal charges against Huawei.

The pound could be volatile today after MPs voted for Theresa May to return to Brussels to renegotiate the Irish backstop in her Brexit deal - something the EU has already said non, nein, and nee to.

Sterling took a small tumble last night, losing one cent against the US dollar as traders calculated that a no-deal Brexit is now more likely.

That’s likely to push shares in London up this morning (as a weak pound boosts overseas earnings).

America’s central bank is meeting to set monetary policy tonight. The Fed is likely to leave interest rates on hold, but it could highlight how the US government shutdown has hurt the economy.

Plus we get new UK borrowing data which may show a drop in mortgage approvals last month.

The agenda

  • 9.30am GMT: UK consumer credit and mortgage approvals data
  • 10am GMT: Eurozone consumer confidence
  • 7pm GMT: US Federal Reserve sets interest rates

Updated

 

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