The report, based on anecdotal information collected by the 12 regional Fed banks through February 25, said consumer spending was also held back by harsh winter weather and higher costs of credit. Manufacturing strengthened, but companies reported “concerns about weakening global demand, higher costs due to tariffs and ongoing trade policy uncertainty.”
The report is likely to support the decision by many Fed officials to pledge patience on future interest-rate hikes, which has prompted dovish shifts elsewhere. And that was exactly the message from John Williams, president of the Fed’s New York regional bank.
“I expect growth to slow considerably relative to last year, to around 2 per cent,” Mr Williams said in the text of a speech. “Three developments contribute to this view: a downturn in global growth, heightened geopolitical uncertainty, and the effects of tighter financial conditions.”
Mr Williams said the base case outlook looked good “but various uncertainties continue to loom large. Therefore, we can afford to be flexible and wait for the data to guide our [policy] approach”.
Hint: the Fed’s not rushing to lift rates. Mr Williams said the current federal funds rate of 2.4 per cent ” puts us right at neutral”.
NAB FX strategist Rodrigo Catril said Mr Williams’ comments signal a Fed on hold: “We note previous indications from the Fed suggested that the current rate was at the lower end of the range of neutral. If estimates of the neutral rate have fallen again, then there is less reason to expect the Fed to hike rates again this cycle.”
Aussie slides
It’s not just the Fed of course that’s standing still or being pushed back.
The local currency slid further as global investors reset positions in light of revised expectations for Australian interest rates.
RBA governor Philip Lowe on Wednesday told The Australian Financial Review Business Summit that: “It’s hard to think of a scenario where interest rates would need to go up this year.”
Overnight the Bank of Canada shifted even more to the rate sidelines, reluctantly so, as did the Bank of England.
While the Canada’s central bank remains keen to lift rates to bolster policy options in the future, it held its key rate as expected at 1.75 per cent at its latest policy meeting in Ottawa overnight.
In the post-meeting statement, the central bank said the outlook continues to warrant “a policy interest rate that is below its neutral range“. That’s a marked retreat from its January statement: “the policy interest rate will need to rise over time into a neutral range to achieve the inflation target”.
As for the Bank of England, rate-setter Michael Saunders said it should wait and see how Brexit unfolds before shifting its policy stance.
“The possibility that monetary tightening might be needed in the future does not necessarily mean we need to tighten now,” Saunders said in a speech at Imperial College in London.
“Given that at present economic growth is probably not strong enough to create excess demand and inflation is reasonably well behaved, for now it makes sense to wait and to see how Brexit developments unfold.”
Later today, European Central Bank policymakers meet. While no policy moves are expected, the bank is expected to downgrade euro zone growth forecasts. And in the process put the timing for a rate hike further into the future.
Today’s Agenda
Local data: AiG performance of construction February, Trade January, Retail sales January
NAB forecasts nominal retail sales lifted by 0.3% m/m in January, as indicated by the NAB Cashless Retail Sales Index.
Overseas data: Euro zone fourth quarter GDP; ECB policy meeting; US consumer credit January
Capital Economics on the ECB: “… we expect the ECB to cut its economic growth forecasts and to stress that it has the tools to loosen policy if needed. But it is unlikely to change its forward guidance or policy settings at this stage. And while President Draghi will probably talk up the prospect of a fresh round of refinancing operations (TLTROs), we suspect that no details will be agreed at this meeting.”
Market Highlights
SPI futures up 2 points to 6249 at about 8.15am AEDT
AUD -0.8% to 70.28 US cents
On Wall St at 4pm: Dow -0.5% S&P 500 -0.7% Nasdaq -0.9%
In New York, BHP +0.6% Rio +0.5% Atlassian -0.9%
In Europe: Stoxx 50 -01.% FTSE +0.2% CAC -0.2% DAX -0.3%
Spot gold -0.1% to $US1286.52 an ounce at 1.04pm New York time
Brent crude -0.4% to $US65.63 a barrel
US oil -1.1% to $US55.96 a barrel
Iron ore flat at $US87.05 a tonne
Dalian iron ore -1% to 613 yuan
LME aluminium -0.4% to $US1866 a tonne
LME copper -0.2% to $US6468 a tonne
2-year yield: US 2.51% Australia 1.65%
5-year yield: US 2.50% Australia 1.69%
10-year yield: US 2.69% Australia 2.09% Germany 0.12%
US-Australia 10-year yield gap as of 8.18am AEDT: 60 basis points
From Today’s Financial Review
Labor’s wage plan won’t lift standards: Opposition Leader Bill Shorten’s push to drive up wages and return to union-based bargaining wouldn’t boost living standards, say business chiefs.
Chronican named as chairman of NAB: NAB has named acting CEO Phil Chronican as its new chairman, following the resignation of Ken Henry in the wake of the banking royal commission fallout.
RBA defies growth slowdown: RBA governor Philip Lowe has downplayed the risks of slowing growth, saying rates will remain on hold, as investors bank on the central bank to cut rates by November.
United States
Wall Street’s main indexes fell for a third session on Wednesday, with the S&P 500 posting its biggest one-day decline in a month, as healthcare and energy shares slumped and investors sought reasons to buy after the market’s strong rally to start the year.
The energy sector dropped 1.3 per cent as US crude prices dipped and Exxon Mobil shares fell 1.1 per cent after the oil company said it plans to boost spending for several years to restore flagging oil and gas production.
In other corporate news, General Electric shares fell 7.9 per cent, extending losses from a day earlier when the conglomerate’s chief executive warned of negative industrial cash flow this year.
The US trade deficit widened in 2018 to a 10-year high of $US621 billion ($884 billion), bucking President Donald Trump’s pledges to reduce it, as tax cuts boosted domestic demand for imports while the strong dollar and retaliatory tariffs weighed on exports.
The annual deficit in goods and services increased by $US68.8 billion, or 12.5 per cent, Commerce Department data showed. The December gap jumped from the prior month to $US59.8 billion, also a 10-year high and wider than the median estimate of economists.
The merchandise-trade deficit with China – the principal target of Trump’s trade war – hit a record $US419.2 billion in 2018.
Europe
European shares stalled on Wednesday as weak results from the troubled auto sector weighed and investor confidence in a rally that has sent stocks shooting up this year showed signs of fraying.
Exuberance in Chinese shares over hopes for fresh stimulus failed to spill over into European trading where the STOXX 600 dipped from five-month highs, ending just below parity.
“The good news is China is now easing quite aggressively. The less good news is it takes time for credit easing to impact the domestic and global economies,” said Nicholas Brooks, head of economic and investment research at Intermediate Capital Group.
“We think Europe will see growth pick up in the latter part of 2019 as China import demand stabilises and recent exceptional domestic factors weighing on Europe growth start to fade.”
Auto stocks fell after German bearings maker Schaeffler warned of an “extremely challenging” business environment in 2019 and said it would restructure, sending its shares down 6.2 per cent.
“The midpoint of the new guidance implies 17 per cent consensus earnings (EBIT) downgrades, and the 2020 guidance elimination will likely hurt sentiment,” said UBS analysts.
The sector index fell 0.9 per cent as German car makers Daimler, BMW, and Volkswagen tumbled, dragging the DAX down 0.3 per cent.
Traders said the stocks were also hurt by an article in Handelsblatt saying the European Commission is preparing fines on German car makers in an ongoing antitrust investigation.
Carmaker shares, facing a potent cocktail of slowing global growth and rising trade tariffs, have been under pressure for months.
Credit Agricole fell as much as 2.7 per cent after French newspaper Les Echos said its private banking unit Indosuez was among the banks named in a report about a money laundering network alleged to have channelled billions of euros from Russia.
A Credit Agricole spokeswoman said Indosuez had “fulfilled all its obligations regarding anti-money laundering”. Credit Agricole ended off lows, down 0.6 per cent.
Dutch bank ING also tumbled 2.2 per cent in its second day of losses after the report on money laundering.
Asia
Capital Economics on China data: “On Thursday, the FX data will probably show a fall in the value of China’s reserves in February. Pressure on the renminbi has diminished in recent weeks, which should have allowed the PBOC to refrain from substantial FX intervention. Instead, the fall in FX reserves is likely to have been driven mainly by valuation effects from moves in exchange rates and bond prices.”
‘Indonesia should be a top five trading partner’: Indonesia is Australia’s 13th largest trading partner but it should be in the top five. The recently-signed FTA will get it there, says Simon Birmingham.
China stocks climbed on Wednesday to nine-month closing highs, bolstered by hopes Beijing would pursue more stimulus this year to underpin the cooling economy, even as investors watched for developments in Sino-US trade talks.
The blue-chip CSI300 index rose 0.8 per cent to 3848.09, its highest close since May 23, 2018, while the Shanghai Composite Index closed up 1.6 per cent at 3102.10 points, its highest close since June 7, 2018.
So far this year, the Shanghai stock index is up 24.4 per cent and the CSI300 has risen 27.8 per cent, while China’s H-share index listed in Hong Kong is up 14.4 per cent. Shanghai stocks have risen 5.5 per cent this month.
China’s state planner said on Wednesday the government would implement measures to further boost domestic consumption this year.
In Hong Kong, the Hang Seng index rose 0.3 per cent to 29,037.60, while the China Enterprises Index gained 0.1 per cent to 11,592.03 points.
Around the region, MSCI’s Asia ex-Japan stock index was firmer by 0.1 per cent, while Japan’s Nikkei index closed down 0.6 per cent.
Currencies
Bank of Canada’s dovish tilt: The Bank of Canada has had a rethink on interest rates, reflecting slower than expected growth at home and overseas.
Modern monetary nonsense: Kenneth Rogoff: Misguided ideas may yet drag the issue of US central-bank independence to centre stage.
Commodities
Aluminium and other industrial metals drifted lower on Wednesday as investors awaited more signs on whether demand in top metals consumer China would rebound after the Lunar New Year.
So far, signs of metal demand in China have been lacklustre, with rising inventories in the world’s second-largest economy and weak physical premiums.
“We’re in a holding zone here with two key areas of focus. The China February macro data and secondly, whether we start to see more evidence of a seasonal pick up in demand,” said analyst Nicholas Snowdon at Deutsche Bank in London.
“There are more questions to be answered and in that context it’s a point where you’re not going to see investors building on positions built up over the past month or so, conviction will remain relatively limited.”
The London Metal Exchange index of six major base metals has gained 5 per cent over the past three weeks, with data showing net long positions building up in many of the metals.
LME benchmark aluminium dropped 0.4 per cent to $US1866 a tonne in closing open outcry activity.
The premium of cash LME copper over the three-month contract rose to $US70 a tonne, the highest since January 2015, indicating tight availability. Analysts say the shortages are mainly in the LME system, with supply available elsewhere. One trader said a large shipment of copper was heading to LME warehouses.
LME three-month copper declined 0.2 per cent to finish at $US6468 a tonne.
Shanghai nickel prices rose sharply on low inventory levels and recovering demand.
The most-traded May nickel contract on the Shanghai Futures Exchange rose as much as 1.9 per cent to 106,460 yuan ($US15,859) a tonne, its highest since October 10, before closing at 106,040 yuan.
LME nickel fell 0.5 per cent to end at $US13,585 a tonne.
LME nickel inventories extended their decline to the lowest since July 2013, data showed, while China’s nickel ore inventory has dropped 12 per cent so far this year, Argonaut Securities analyst Helen Lau wrote in a note.
Australian Sharemarket
Rich Lister Barry Lambert plants Ecofibre IPO: Rich lister Barry Lambert, chairman of float candidate hemp company Ecofibre Ltd, says he will continue to rock the boat with Australia’s “lazy” politicians about legalising medicinal cannabis, but in the meantime will grow earnings by selling products such as infused oils, yoga mats and office chairs.
Australian shares closed at a fresh six-month high on Wednesday despite fourth quarter GDP figures coming in below market expectations.
The S&P/ASX 200 Index climbed 46.3 points, or 0.8 per cent, to 6245.6 while the broader All Ordinaries advanced 45.4 points, or 0.7 per cent, to 6326.8.
The Australian economy grew by just 0.2 per cent in the fourth quarter of 2018, below expectations of a 0.3 per cent rise.
Street Talk
Soft serve: Fonterra pitches ice-cream unit, bids due this week
Navis Capital to study buyer interest in $700m-plus education company
Arowana launches private credit fund
with Reuters, Bloomberg, AAP
Comments? Questions? Let us know what you think of Before the Bell: timothy.moore@fairfaxmedia.com.au
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