The language emanating from central banks has been of a more ‘hawkish‘ tone over the last couple of weeks. Communications this week from the Federal Reserve and the Bank of England have once again demonstrated clear intent on the future direction of monetary policy. Interest rates will continue to rise over the coming months, starting with the Fed in March followed by the BOE in May.
A sign that markets remain fragile to the prospect of further rate hikes was seen on Wednesday when minutes were released from Janet Yellen’s final FOMC meeting as Fed governor. To begin with the DOW Jones was higher at over 300 points, with the likes of CNBC reporting that traders were initially reacting to the Fed’s apparent lack of worry over rising inflation. As the full contents of the minutes became clear (in that the Fed is preparing to continue hiking rates throughout the year) the DOW ended up reversing all gains and by the close had fallen 166 points. The 10 year bond yield also nudged up closer to 3% at 2.95%.
In the lead up to Jerome Powell’s first rate rise as Fed governor, the likes of Morgan Stanley have warned that the sharp sell off at the beginning of February was an “appetizer, not the main course.” This follows earlier warnings sent out by the Bank for International Settlements, the International Monetary Fund and the World Bank dating back to last year. They have all indicated that rising inflation coupled with rising interest rates are a risk to high asset valuations and the ‘global recovery‘.
How markets react in the coming weeks as rates rise may give some indication of whether an impending and sustained downturn in equities is approaching.
- Mark Carney has told MPs that financial markets, which predict a greater than 50 per cent chance of a second interest rate rise in May, were now moving appropriately in line with the underlying economic data. While the Bank of England governor and three colleagues stressed to the Treasury Committee that any interest rate rises would be limited and gradual, he said that there were likely to be “something more than three rate increases — spread out” over the next few years.
- The Bank of England could end up needing to raise interest rates faster than investors expect, its chief economist told lawmakers on Wednesday, striking a slightly more hawkish tone than his central bank colleagues.
- BoE Governor Mark Carney, appearing alongside Haldane, said there was no need to give a direct commitment on rates as markets broadly understood the BoE’s message – unlike in the months before November’s rate rise, the first in over a decade.
- “I would judge the risks to the MPC’s latest projections, for both UK demand and inflation, as lying to the upside,” Haldane wrote in an annual report to parliament.“In my view, this would put the balance of risks to the path of interest rates necessary to return inflation sustainably to target to the upside,” Haldane said.
- The UK economy grew by 0.4% during the final quarter of 2017, according to the Office for National Statistics. The result was weaker than the expected 0.5% and was blamed on a slowdown in consumption and business investment.
- Household spending grew by 1.8% between 2016 and 2017 – its slowest rate of annual growth since 2012 – in part reflecting the increased prices faced by consumers.
- In year-on-year terms, downwardly revised growth of 1.4% was the weakest in more than five years.
- Federal Reserve officials see increased economic growth and an uptick in inflation as justification to continue to raise interest rates gradually, according to minutes from the central bank’s latest meeting.
- Though the policymaking Federal Open Market Committee chose not to hike its target rate at the Jan. 30-31 gathering, members indicated clearly that the path ahead for rates was higher.
- Philadelphia Federal Reserve Bank President Patrick Harker on Wednesday said he still thinks just two interest-rate hikes this year is “likely appropriate,” but signaled he is open to more if needed.
- “Based on the relatively strong economy, but the continued stubbornness of inflation, I’ve penciled in two hikes for 2018,” Harker said at Saint Louis University in St. Louis, Missouri. “I use pencil because the data can change, and sometimes they don’t accurately point to future events.”
- The UK has seen the strongest two quarters of productivity growth since the recession of 2008, according to the latest data.
- Output per hour rose 0.8% in the three months to December, the Office for National Statistics said. It follows growth of 0.9% in the previous period.
- There was also a better than expected rise in wages. Excluding bonuses, earnings rose by 2.5% year-on-year.
- However, unemployment edged higher, but still remains low at 4.4%.
- “It has pretty much failed thus far on … the traditional aspects of money. It is not a store of value because it is all over the map. Nobody uses it as a medium of exchange,” Carney told students at London’s Regent’s University.
- But the crypto-currency’s underlying technology may still prove useful as a way to verify financial transactions in a decentralised way, he added in response to a question.
- The central bank governor also said that, to make Britain’s departure from the European Union in March 2019 as smooth as possible, British regulators intended to give financial institutions “the benefit of the doubt, beyond the last minute”.
- The U.S. stock market only had a taste of the potential damage from higher bond yields earlier this year, with the biggest test yet to come, according to Morgan Stanley.
- “Appetizer, not the main course,” is how the bank’s strategists led by London-based Andrew Sheets described the correction of late January to early February.
- “It’s when growth softens while inflation is still rising that returns suffer most,” the strategists wrote. “Strong global growth and a good first-quarter reporting season provided an important offset. We remain on watch for ‘tricky hand-off’ in the second quarter, as core inflation rises and activity indicators moderate.”
- Debit cards are set to overtake cash as the most frequently used payment method in the UK later this year, according to UK Finance, which represents leading finance and banking firms.
- In 2006, 62% of all payments in the UK were made using cash; in 2016 the proportion had fallen to 40%. By 2026, it is predicted cash will be used for just 21%, according to figures from UK Finance.
- Bank of England figures meanwhile show that while the volume of cash in the economy typically increases every year, it is now doing so at the slowest rate since 1972.
- Goldman’s economist team wrote that “Federal fiscal policy is entering uncharted territory” after Congress “voted twice in the last two months to substantially expand the budget deficit despite an already elevated debt level and an economy that shows no need for additional fiscal stimulus.”
- As a result of this historic expansion in U.S. borrowing during a period of economic growth, alongside rising bond yields, Goldman predicts a surge in the cost of servicing American debt, and goes so far as to warn that the current US fiscal trajectory would lead to catastrophe: “the continued growth of public debt raises eventual sustainability questions if left unchecked.”
- The UK’s Brexit trade deal with the EU will not be finalised before exit day, Guy Verhofstadt has warned.
- Instead there will be an “annex” inside the withdrawal agreement which will set out what a future relationship might look like, to be thrashed out during the transitional period while current rules remain in place.
- The Prime Minister has previously ruled out such a situation, stating instead that a new trade deal must be agreed while negotiations to leave the union take place so the UK can be ready to forge new trade deals around the world in 2019.
- Since December, S&P 500 firms have announced buybacks totaling $171 bn. YTD announcements of $67 bn represent a 22% increase versus the same period in 2017. The buyback window has re-opened and firms are taking advantage of the recent correction; the GS Buyback Desk reported that last week was the most active week in its history.
- The $171 billion in YTD stock buyback announcements is the most ever for this early in the year. In fact, it is more than double the prior 10 year average of $77 billion in YTD buyback announcements.
- UK retail sales rose 0.1% in January the Office for National Statistics said on Friday. This was compared to a decline of 1.4% in the previous month, revised from a 1.5% decrease. Economists had forecast a reading of a 0.5% advance.
- Year-on-year, retail sales rose by 1.6% last month. Analysts had penciled in a 2.6% gain.
- A firm majority of economists, 32 of 57, polled Feb 9-13 after the Bank concluded its policy meeting and news conference, said it would raise its Bank Rate to 0.75 percent in May, alongside its next quarterly Inflation Report.
- In a January poll, only 13 of 71 economists had a rate hike in their forecasts for next quarter.