Fed Raises Interest Rates, Signals One More Increase This Year Benchmark federal-funds rate increased to a range between 2% and 2.25%
(…) Projections released after Wednesday’s meeting show that most Fed officials expect they will raise rates by one percentage point through next year, and most officials penciled in at least one more quarter-point increase for 2020.
That would leave the benchmark rate slightly higher than 3.25%. (…)
Economic projections released after the meeting envision an unusually favorable set of conditions, in which the unemployment rate holds below 4% over the next three years but inflation never rises far beyond the Fed’s 2% target. (…)
The risk that inflation climbs higher and faster than anticipated could require the Fed to raise rates “a little bit quicker,” Mr. Powell said. He quickly added, “We don’t see that. We really don’t see that.” (…)
“If this, perhaps inadvertently, goes to a place where we have widespread tariffs that remain in place for a long time, a more protectionist world, that’s going to be bad for the United States’s economy,” said Mr. Powell. (…)
Given their large share of global output, “the performance of the emerging market economies really matters to us in carrying out our domestic mandate,” said Mr. Powell.
Source: Natixis (via The Daily Shot)
Here’s core PCE inflation since 1994:
BTW:
U.S. New Home Sales Increase As Prices Decline
New single-family home sales increased 3.5% (12.7% y/y) during August to 629,000 (SAAR) from 608,000 in July, revised from 627,000. June’s sales level also was revised lower to 618,000 from 638,000. Sales during August were 11.7% below the high of 712,000 reached in November 2017.
The median price of a new home declined 2.4% to $320,200 (+1.9% y/y) from a little-revised $328,100. The average price of a new home eased slightly to $388,400 (+5.2% y/y). (…)
Global Trade Growth Is Slowly Losing Steam
(…) In a report on Thursday, DHL said its trade barometer weakened in September, dropping to the lowest since 2016 and indicating a slower pace of growth in the months ahead. It noted “rising political tensions.” (…)
Source: Capital Economics (via The Daily Shot)
An Economic Cold War is Looming Some observers suspect that Washington’s ultimate goal is to permanently disentangle America’s economy from China’s
(…) The situation has no precedent in post-war history. The U.S. had few economic ties to the Soviet Union, so their strategic rivalry seldom spilled over to trade. America’s trade disputes with Japan carried no security fallout because the two are military allies. By contrast, Washington worries that China’s use of cybertheft, trade barriers and forced technology transfer not only confer economic advantage but make it a more formidable geostrategic adversary. (…)
Tariffs and other penalties, such as forthcoming restrictions on the export of key technologies, weaken China’s appeal as a destination for foreign investment and start to unravel the supply chains that tie the U.S. to China. The longer tariffs remain in place, the more multinationals that want to sell to the U.S. will seek alternatives to China to source production. Taiwan and Thailand are already marketing themselves as alternatives.
Yet, moving a supply chain out of China is harder than it sounds. Mr. Kroeber notes in an interview that China doesn’t offer just low labor costs, it also has well-developed infrastructure and logistics, skilled labor such as engineers, and access to China’s own huge internal market. “That can’t be matched somewhere else.” Multinationals may need two supply chains: one with access to the U.S., and one with access to China. They would then have to decide whether their U.S.-centric or China-centric supply chain serves the rest of the world. (…)
Yet over time, China could overcome those disadvantages. It “has all the necessary prerequisites to make an Asian-based trading bloc work without the U.S.: a large domestic market, political support for open markets and manufacturing expertise,” writes Larry Brainard of TS Lombard, an investment advisory. China already does more trade in manufactured and intermediate goods with the European Union than the U.S., and twice as much with the rest of Asia, he notes. (…)
How China Pries Technology From U.S. Companies Beijing is increasingly leaning on levers to extract intellectual property—sometimes coercively—say U.S. companies. China says it’s payment for market access.
(…) China’s tactics, these interviews and documents show, include pressuring U.S. partners in joint ventures to relinquish technology, using local courts to invalidate American firms’ patents and licensing arrangements, dispatching antitrust and other investigators, and filling regulatory panels with experts who may pass trade secrets to Chinese competitors. (…)
At a January U.S. Chamber of Commerce dinner in Washington, executives pressed U.S. Ambassador to China Terry Branstad not to hit Beijing too hard on technology issues,according to dinner attendees. China has many ways to get even, warned Christopher Padilla, a vice president of International Business Machines Corp. , which licenses technology to Chinese firms. (…)
About one in five members of the American Chamber of Commerce in Shanghai say they have been pressured to transfer technology, according to a survey conducted in the spring. Of those companies, 44% in aerospace and 41% in chemicals report “notable pressure.” China considers both industries strategically important. (…)
Advanced Micro Devices Inc., a Silicon Valley chip company, entered a joint venture in 2016 with Chinese private and state-owned entities, including the government’s Chinese Academy of Sciences. AMD licenses microprocessor technology to the venture and is developing new computer chips with it.
AMD has received about $140 million in licensing through 2017, enough to help boost it into the black last year for the first time since 2011. “We created a joint venture that was very much a win-win,” AMD Chief Executive Lisa Su said at a 2016 conference. An AMD spokesman says the joint venture is “part of our strategy to create a complementary product offering.” (…)
Regulatory panels, packed with industry experts, must approve many chemicals before they can be produced in China and require detailed information on formulas and production processes, say U.S. trade groups and chemical firms. “Enough information to duplicate the product,” is how the American Chemical Council trade group put it in a filing to the U.S. government. (…)
China business schools evolving rapidly The shift from sending students overseas to offering MBAs at home is speeding up
Trump Accuses China of Trying to Interfere in U.S. Elections
White House to Raise Pressure on Canada With Mexico-Only Nafta Draft
Trump Seeks International Support on Iran, but Finds Little
Japan dodges U.S. auto tariffs, for now, as Trump and Abe agree on trade talks
(…) Of the 3.2 million vehicles sold this year in Japan, only 0.3 percent were American brands, according to data from Japan’s auto industry associations. In contrast, Japanese brands have a market share of about 40 percent in the U.S. (…)
While the U.S. currently has a 2.5 percent import tariff on passenger cars and 25 percent on trucks, Japan removed its last levies on auto imports almost four decades ago. Japan has long argued the reason for low presence of U.S. cars has nothing to do with tariffs: Japanese consumers generally perceive U.S. cars as bulky and inefficient — minicars and other locally made fuel-saving models dominate the country’s vehicle sales. (…)
Ford CEO says Trump’s metal tariffs cost automaker $1-billion
Steel and aluminum tariffs imposed by the Trump administration have cost Ford Motor Co about $1-billion in profits, its chief executive officer said on Wednesday, while Honda Motor Co said higher steel prices have brought “hundreds of millions of dollars” in new costs.
“From Ford’s perspective the metals tariffs took about $1-billion in profit from us,” CEO James Hackett said at a Bloomberg conference in New York, “The irony of which is we source most of that in the U.S. today anyway. If it goes on any longer, it will do more damage.” (…)
Honda has not boosted U.S. vehicle prices as a result of the higher costs but the issue is “certainly part of our thinking as we go forward,” Schostek told reporters after the hearing. (…)
IHS Markit estimates that full implementation of the 232 tariffs would add between $1,800 and $5,700 to a new vehicle’s price tag and cut new auto sales by around 2.2 million units in 2020 as well as slice total sales to as little as 14.5 million units from expectations of 17 million vehicles this year.
The new tariffs would also cost around 300,000 in auto-related jobs in factories and dealerships across the country, and slash U.S. economic growth by 1.1 percentage points to 2.2 per cent, IHS said. (…)
Oil Gains After U.S. Holds Fire on Opening Reserves Oil prices climbed, maintaining four-year highs, after the U.S. indicated it wouldn’t open up its strategic petroleum reserves to flood the market and put a cap on prices.
Large Investors Dive Into Risky Loan Securities Canada’s government pension plan is investing $285 million in the riskiest securities of collateralized loan obligations, as large institutions start funneling more cash into a market that has received record sums in 2018.
(…) CLOs raise money by issuing bonds and equity to outside investors and use the cash to buy bundles of below-investment-grade, or “leveraged,” corporate loans. The money coming in from the bundled loans pays investors’ interest and principal on the CLO bonds, in a process similar to mortgage-backed securitizations. Equity holders typically must cover loan losses above a certain threshold—an arrangement that accounts both for CLO equity’s risk and for its higher expected returns.
CLO equity has historically been purchased by hedge funds or private-equity firms. Purchases by large institutions such as CPPIB, with $275 billion in assets, could give CLO managers significantly more firepower to launch new deals, further boosting demand for leveraged loans and potentially adding to risk in junk debt markets. Managers can borrow about $9 million of bonds for each $1 million of equity raised to buy up leveraged loan pools. (…)
Purchases by CLOs helped push the leveraged-loan market to $1.22 trillion in June, exceeding the size of the junk bond market for the first time in 10 years.
The global CLO market has grown 25% in the past two years to about $700 billion outstanding, according to data from JPMorgan Chase & Co. Annual returns from the equity have averaged about 18% since 2004, according to research from JPMorgan, but some analysts caution that if leveraged loan defaults rise, certain CLOs will only have enough cash to keep paying their bonds, leaving equity holders with losses.
Institutional investors routinely purchased CLO bonds in recent years because they pay floating-rate interest—an advantage when interest rates are rising—and have outperformed more conventional corporate debt. (…)
Howard Marks’ latest letter is a must read.
EARNINGS WATCH
The earnings season officially begins Oct. 12 but 12 S&P 500 companies have already reported and Zacks says that while “it is premature to draw any conclusions from the results thus far, but they are nevertheless on the weaker side relative to what we had seen from the same group of 12 index members in other recent periods.”
America’s High-Stake Midterm Elections
The stakes in the upcoming congressional midterm elections (November 6) are particularly high. The Republicans currently control both the House and the Senate. Not only would the loss of one or both chambers of Congress bring Trump’s agenda to a skidding halt, it could even signal the beginning of impeachment proceedings against him.
The 2018 midterms can also be divided into two separate elections. The Democrats are favoured to regain control of the House on account of Republican vulnerability in numerous suburban areas, whereas the Republicans look set to retain control of the Senate as the outcome there hinges more on rural states where Trump still has strong support. In all, 435 seats in the House of Representatives and 35 of the 100 seats in the Senate will be up for grabs in November 2018.
Historically, the incumbent president’s party has not fared well in midterm elections. It has lost seats in the House in 9 of the last 10 elections held halfway through the president’s first term. In the Senate, it has managed somewhat better. The sitting president’s party has given up seats in only 6 of those 10 elections. Historically, supporters of the party not in power have tended to be more motivated to show up at the polls. (…)
Historically, the relatively low voter turnout in the midterms has favoured the Republicans. This is because younger people, who make up a large part of the Democratic base, tend to vote at lower levels than do older white voters, who tend to favour the Republicans. In 2014, voter participation in the midterms was 37% compared with 55% in the last presidential election.
The Democrats are hoping that disapproval of President Trump will motivate millennial voters and other Democratic supporters to show up at the polls in greater numbers. So far, based on the total number of votes cast in the primaries (where candidates are selected for the general election), the Democratic base appears far more enthusiastic about voting than their Republican counterparts do. (…)
However, the apparent greater voter enthusiasm of the Democratic base is at least partially counteracted by two factors working in the Republicans’ favour. 1) The tendency for Democrats to win with overwhelming margins in heavily Democratic urban areas, thus wasting votes; and 2) gerrymandering, which is the process whereby state governors redraw the boundaries of legislative districts to favour their party, essentially by moving likely non-supporters to districts lost in advance. In order to overcome these barriers and have a chance of regaining control of the House of Representatives, Democrats would have to win the congressional popular vote by at least 7 percentage points. As the following chart illustrates, they are currently just above this threshold in the polls. (…) (NBF)
Democrats’ enthusiasm to blunt Trump soars for congressional election: Reuters/Ipsos poll
(…) Across almost all demographic groups, more Democrats say they are certain to vote compared to poll results in 2014, the last non-presidential election year.
The Reuters/Ipsos poll has been tracking Americans’ interest in voting since 2010 and the polling on voter enthusiasm is built on data spanning 2014 to 2018, including data not readily available elsewhere. (…)
Even among groups often thought to favor U.S. President Donald Trump, a Republican, like whites without a college degree and avid church goers, those who identify as Democrats are more interested in voting this year, while Republicans are not. (…)
Enthusiasm is everything in the congressional elections, when turnout is typically lower than when the White House is also up for grabs. Only about four in 10 voting-age Americans bother to cast ballots compared to about six in 10 when it is.
When voters in one party are especially determined to be heard in a congressional election, it can swing control of the U.S. House of Representatives and the Senate. (…)
FiveThirtyEight forecasts that Democrats have 80.4% chance to take control of the House. The Senate odds are only 32% in favour of Democrats.