Fed’s Powell Faces Senators After Rate Cut Signal Federal Reserve Chairman Jerome Powell will testify before the Senate Banking Committee after signaling to a House panel that the central bank is ready to cut interest rates later this month.
(…) “It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook,” Mr. Powell said Wednesday.
He noted that data from Europe and Asia have “continued to disappoint” and that manufacturing, trade and investment are weak “all around the world.” (…)
“I think it’s quite important that we fight…to keep inflation up to 2% and use our tools to achieve that.” (…)
Asked by Rep. Patrick McHenry (R., N.C.) on Wednesday if the Fed “has the capacity to make independent monetary policy decisions under law,” Mr. Powell answered affirmatively.
“We will always focus on doing the job you have assigned us, and we will always do it to the best of our ability and based on objective analysis and facts,” Mr. Powell said.
Chairman Powell’s testimony started with
Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee’s 2 percent objective. However, uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit. And there is a risk that weak inflation will be even more persistent than we currently anticipate.
Fed Saw Strengthening Case for Rate Cuts Last Month, Minutes Show By the time officials met in June, they judged that the risks of weaker growth had shifted notably
(…) Officials didn’t see an imminent downturn and expected the economy to continue growing steadily, but the minutes said many officials “attached significant odds to scenarios with less favorable outcomes.”
Officials also ticked through a list of reasons why lower interest rates might help the economy. Some believed it could “help cushion the effects of possible future adverse shocks to the economy,” the minutes said. Others believed lower rates were warranted given weak inflation readings and a diminished prospect that low unemployment would give way to unsustainable price pressures.
(…) Fed officials recognized they could increase borrowing costs and send stock prices falling if officials didn’t cut interest rates, absent an improved economic outlook. (…)
The June meeting included a long discussion of growing signs of softness in the economy, including weak shipments and orders of new capital goods, lower profit growth forecasts from private-sector analysts, declines in manufacturing activity, weaker global growth, softer export sales and elevated policy uncertainty. (…)
Let’s admit it, gone is the “data dependent” Fed and gone is the notion of “transitory” weakness in inflation. The FOMC is very nervous about its baseline outlook in this “highly uncertain world” and has shifted to risk management very much in tune with what it believes financial markets are saying. Puppet Fed?
A 25 points cut in 2 weeks is now baked in. Fifty points could well scare everybody off…
Back to data, the Fed must have been relieved by the latest stat on consumer spending but two different data sets on retail trade keep the outlook very “uncertain”: if retail demand is improving, why are retailers not seeking more workers? Retail job openings are down 16% YoY in May.
More data:
Wholesale inventories increased 0.4% (7.7% y/y) during May following an unrevised 0.8% April gain. (…) Wholesale sales rose 0.1% during May (-0.1% y/y) following a 0.4% decline. (…)
And just when Powell says inflation remains “muted”:
CPI for all items rises 0.1% in June as shelter index rises, gasoline index falls The index for all items less food and energy rose 0.3 percent in June (SA); up 2.1 percent over the year (NSA).
Core CPI jumps 0.3% MoM as core Goods rise 0.4% following a long series of monthly declines. Apparel is up 1.1%.
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Fed’s dovish tilt stirs debate on how far it will go Some investors warn that too much stimulus could distort financial markets
Negative bond yields spill into Europe’s emerging markets
Sovereign debt from Czech Republic, Hungary and Poland now offers sub-zero returns
Sources of uncertainty:
Mnuchin Urges Suppliers to Seek Huawei Exemptions Treasury Secretary Steven Mnuchin in recent days urged U.S. suppliers of Huawei Technologies to seek exemptions to resume sales to the blacklisted Chinese firm.
(…) Treasury Department spokeswoman Monica Crowley disputed assertions that Mr. Mnuchin was advocating action on the part of Huawei suppliers.
“Secretary Mnuchin speaks with CEOs in the private sector on a regular basis,” Ms. Crowley said. “At no point has the Secretary ‘urged’ any company to take any action with regard to Huawei.”
The actions are noteworthy as the Treasury Department isn’t directly involved in determining the parameters of the blacklist, a national-security process run by the Commerce Department. (…)
Trump Team Sends Defiant Signal to Beijing by Meeting Hong Kong Activist
U.S. Launches Probe of French Digital Tax French proposal will apply a 3% tax on revenue that big technology companies reap in France
U.S. Trade Representative Robert Lighthizer said Wednesday his office would launch a probe of the digital services tax, or DST, under the same broad law the Trump administration relied on for its trade conflict with China.
“The United States is very concerned that the digital services tax which is expected to pass the French Senate tomorrow unfairly targets American companies,” Mr. Lighthizer said in a statement. “The President has directed that we investigate the effects of this legislation and determine whether it is discriminatory or unreasonable and burdens or restricts United States commerce.”
The French proposal, likely the first in a wave of proposed digital-services taxes to take effect in Europe, will apply a 3% tax on revenue that companies like Alphabet Inc.’s Google or Amazon.com Inc. reap in France from such activities as undertaking targeted advertising or running a digital marketplace. (…)
Officials and business leaders in Washington have argued that the tax unfairly targets American companies and could lead to double taxation and multiple new overlapping tax regimes. (…)
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Laurent: Donald Trump Throws a Tax Bomb at Emmanuel Macron The White House is using France’s digital tax in an attempt to divide and rule in the EU. It’s a big test of whether Europe’s leaders will stand by Paris.
(…) Trump has used this type of inquiry against China to attack it with unilateral tariffs. This isn’t about patiently waiting for a ruling from the WTO, this is the stuff of trade wars.
While the French initiative certainly has flaws, Paris is also being singled out for political and tactical reasons. Several other countries are introducing a digital tax too, and France would happily ditch its levy in favor of an OECD solution. What’s really motivating Trump’s team is the chance to drive a wedge between the French president Emmanuel Macron and his euro zone partners. Germany has held back from introducing a tech tax of its own, no doubt fearful of U.S. retaliation, while Ireland – whose low corporate tax rates are a magnet for tech giants – has fought hard against the idea.
Remember too that Macron makes a virtue of opposing Trump. He was the only European leader to openly object to starting trade talks with the U.S., and he’s fighting to keep the Iran nuclear deal alive. The tech tax is just another way for Trump to apply counter-measures. (…)
The U.S. president is showing no signs of easing his tariff barrage and the trade-dependent EU economy is stuttering, making it easier for him to apply pressure. Trump is a true test of European unity, and Europe hasn’t passed it yet.
‘Reshoring’ Report Finds Factory Work Not Returning to U.S. Despite escalating tariffs between the U.S. and China, American imports of manufactured goods from China and 13 other Asian countries rose 9% in 2018 to $816 billion, the largest annual increase in nearly a decade and outpacing a 6% increase in domestic manufacturing gross output, according to consulting firm A.T. Kearney Inc.
(…) “What we do see is a sort of China diversification,” he said, as companies look to reduce their exposure to trade tensions, rising Chinese labor costs and other risks.
Some American companies have halted or delayed plans to expand domestic plants as tariffs on Chinese imports increase the cost of products from bicycle parts to the components used to assemble loudspeakers.
Others are reshaping their supply chains, moving some production to Vietnam, the Philippines, Cambodia and India. Such shifts can take months and sometimes lead to logistics bottlenecks and other complications. Although labor tends to be cheaper in other parts of Southeast Asia, logistics infrastructure and factory capacity often aren’t as well-developed as in China. (…)
Although some companies are looking at bringing manufacturing back to the U.S., Mr. Sutherland said those efforts tend to focus on precision manufacturing and operations, where automation and technology help reduce the higher cost of domestic labor.
U.K. Warship Blocks Iranian Vessels From Intercepting Tanker Three Iranian vessels attempted to impede the passage of a commercial tanker, the British government said, a move that threatens to escalate already high tensions in the region.
President Trump made fresh threats to ramp up U.S. sanctions against Iran for stepping up its enrichment of uranium, tweeting that America’s response “will soon be increased, substantially.” (…)
Yet the U.S. faces an uphill challenge to recruit other countries to isolate Iran. While the IAEA’s 35-member board includes U.S. allies who may be open to increasing pressure on Iran, many countries view the Trump administration’s maximum-pressure campaign against Tehran as the primary cause of Tehran’s decision to expand its nuclear work.
Russia’s ambassador to the IAEA, Mikhail Ulyanov, on Wednesday slammed what he called the “destructive U.S. policy” toward Iran and said by refusing to fulfill its own obligations under the deal, Washington had “lost any right to demand this from others.” (…)
Mark Fitzpatrick, a former U.S. nonproliferation official and an associate fellow with the International Institute for Strategic Studies in Washington, said the U.S. would struggle to win backing in the IAEA for stepped-up action against Iran, as it did a decade ago.
“Unlike in the past, when the world was largely united against Iran, now nearly every other member of the Board of Governors blames the U.S. for instigating the crisis,” he said.
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1 thought on “THE DAILY EDGE: 11 JULY 2019”
Lots of weird behind the scenes stuff out there:
New Mortgage Bonds May Prove a Double-Edged Sword for Investors
Bloomberg-Apr 27, 2018
The Federal Housing Finance Agency’s plan to combine Fannie Mae and Freddie Mac mortgages into a single security starting in June 2019
Liquidity. Putting both kinds of MBS into a single pot (along with any older MBS that are exchanged into UMBS) should increase the amount traded per day. That can cut their yields, because investors will accept lower returns on a bond that they know they can more easily offload. Lower MBS yields should translate into lower interest rates for home buyers.
Some observers foresee a potential “race to the bottom” in asset quality. That would occur if the GSEs begin to package loans exhibiting the most undesirable prepayment characteristics into the new securities, because a UMBS has just one price, and investors wouldn’t be able to account for speed differentials between the two GSEs. That would likely lead to lower prices for UMBS reflecting the deterioration in asset quality, meaning higher interest rates for borrowers.
The warning shows the potential dangers for Trump in trying to tackle such a complicated issue that touches heavily on voters’ finances. The president’s chances of winning a second term will likely hinge on the health of the economy next year, and tampering with Fannie and Freddie poses risks with questionable political upside.
While investors say they are worried about there possibly being no federal guarantee, any concerns haven’t yet shown up in bond prices. And mortgage rates remain low.
“The banks aren’t set up for this. The money managers — Pimco, BlackRock — they aren’t set up for this,” Simon said in an interview. “This system has been in place since the 1980s.”
No links but from Bloomberg
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