US Federal Reserve divided over rate policy
The financial markets, which had been pretty upbeat all week, really got a spring in their step on Thursday, after the Fed announced its decision and the September gloom over lack of clarity and direction on rates dissipated.
Ben Steinebach Head of Investment Strategy
The Fed kept its main rate – the Fed funds rate – within the 0.25–0.5% range, but dissent has grown within its policy-making committee. Whereas previous meetings had featured a lone dissenting voice, this time no less than three top rate-setters felt interest rates should be raised immediately, highlighting a distinct lack of agreement and a sharply higher likelihood of a December rate rise. To get there, however, the United States will have to start turning out more consistently sanguine economic data – unlike this past week, when August housing starts lacked lustre but housebuilders recorded improved sentiment in the same month. The financial markets liked the Fed’s decision, and perhaps even more so the outlook for future interest rate increases as its top committee significantly toned down its projections for 2017 and 2018 rate hikes. The Fed funds rate in 2018 is now projected to average 1.9% rather than the 2.4% predicted earlier.
Meanwhile, Japan’s central bank also met on rates – and also held its fire, in this case on cutting rates and on expanding its asset purchase programme. It merely made a marginal change to its inflation target, moving it from 2% to a little over 2% for the medium term. With inflation in Japan having been close to 0% for quite a while, this implies a short-term goal for inflation nearer to 4%. Markets were unimpressed and were led more by the US Federal Reserve.
Fed decision boosts both equity and bond prices
The financial markets, which had been pretty upbeat all week, really got a spring in their step on Thursday, after the Fed announced its decision and the September gloom over lack of clarity and direction on rates dissipated. Apart from this, there wasn’t all that much other news to get the markets moving, except perhaps the massive USD 14 billion settlement demand imposed on Deutsche Bank by the US authorities for past mis-selling of toxic mortgages. The German major saw its share price slump by 15% as investors feared it might be unable to make payment. Although we reckon the bank enjoys sufficient solvency and liquidity levels, we agree that risks loom.
In the corporate arena, only FedEx released its results, beating analysts’ average earnings per share expectations of USD 2.79 by notching up USD 2.90 for the second quarter. Revenue also came in a little higher than expected and the company’s share price moved up. Bond prices rose across the world on the news of the Fed rate decision, taking 10-year yields down in countries such as France, Italy, the United Kingdom and the Netherlands, by around 10 basis points on the previous Friday’s showings. In the United States and Germany yield falls were limited to 8 and 2 basis points respectively, at 1.62% and -0.08%. Equity markets benefited and made significant gains, particularly on Thursday. The US markets recorded an uptick of 1.5% on the previous Friday, while many European markets enjoyed increases of well over double the American figure. The AEX ended Thursday at 455.51, up 3.7% on the previous Friday, which had seen an intra-day low of 439. At the time of writing on Friday morning, the index was fluctuating around 454. The downtrend was echoed in most European equity markets and chiefly reflects disappointing confidence figures for European purchasing managers, provisional September figures for which were released on Friday morning.
Consumer confidence in limelight in week ahead
In the week ahead, companies won’t yet be able to share how the third quarter worked out for them, but a couple of stragglers should still report on the second quarter. Macroeconomics again looks set to be flavour of the week. Three US companies will meet their reporting requirements in the week: Pepsico, Nike and Carnival (the cruise operator, which erroneously made it to my list last week). In addition, many countries will publish fresh consumer confidence data for September: the United States (both the Conference Board and the University of Michigan), the United Kingdom, Germany, France and Italy. Consumer spending should also hog the headlines in Germany, Italy, the United Kingdom, France and the United States. The European Union’s Economic Sentiment Indicator (ESI), which combines consumer and business confidence, is also due out, as are manufacturing confidence figures for Germany (Ifo) and the Netherlands. Inflation figures are slated for release for the wider European Union as well as for Germany, France, Italy, the Netherlands, Belgium and Japan, while we are looking for employment and unemployment figures from Germany, Italy, France, Belgium and the whole of the European Union. More headline-grabbing, the United States will release two sets of figures, one for new house sales (interesting because of last week’s mixed bag of data) and the other for durable goods orders, which are a revealing indicator of the way the economy is moving. Little from central banks in the week ahead, but enough macro data to look forward to.