LONDON/NEW YORK/ TOKYO
Share markets slipped on Thursday as uncertainty over the outlook for U.S. interest rate cuts left investors on edge, with the release of minutes from the Federal Reserve’s last policy meeting exposing rifts over its recent easing. The Chinese yuan’s slump to an 11-year low also sapped their appetite for risk, with dealers saying state-owned banks were seen selling dollars to support the yuan.
The MSCI world equity index, which tracks shares in 47 countries, edged down 0.1%. In Europe, the Euro STOXX 600 fell 0.2% in choppy trade, following a 0.6% drop in MSCI’s broadest index of Asia-Pacific shares outside Japan. Wall Street futures gauges were down between 0.2% and 0.3%. Minutes of the Fed’s July meeting showed deep splits among policymakers over whether to cut interest rates last month, though there was some unity in wanting to signal it was not on a preset path to looser policy.
The Fed cut rates by 0.25% in July. While a couple of Fed members supported a deeper cut of half a percentage point, the minutes showed, a larger number favoured no change at all. That reluctance to loosen policy seems at odds with the expectations for a cut of over 100 basis points by the end of 2020 that are already priced into markets.
Market players said that the minutes reflected a dissonance between the predictions of easing – fuelled by geopolitical concerns such as US-China trade tensions and economic weakness in major economies such as Germany and the apparently solid fundamentals of the US economy. The update last night was a bit of a reality check maybe don’t get ahead of yourself on what the Fed is going to do, said David Madden, market analyst at CMC Markets.
If you forget about the geopolitical headlines, forget about what the bond markets are doing, and look at the underlying indicators of the US people are in jobs, earning decent money, and more importantly spending money. Indeed, the apparent strength of the world’s biggest economy was on display on Wednesday, where Wall Street basked in surprisingly upbeat results from retailers that sent Target surging 20% and Lowe’s Cos up 10%.
But beyond the United States, worries about the fragility of the global economy were evident in data from Europe on Thursday. Germany’s private sector continued to struggle in August, suggesting further that Europe’s largest economy is heading for a recession after its economy shrunk between April-June. Euro zone business growth expectations also fell to their weakest in more than six years on trade war fears, even as the expansion picked up a touch in August.
The Fed minutes raised the stakes for Chairman Jerome Powell’s remarks on Friday at the Fed’s annual policy retreat in Jackson Hole, Wyoming an event investors are waiting for with bated breath. Jackson Hole is big, said Markus Schomer, chief economist at PineBridge Investments. The Powell speech will be hugely important – there is a lot of pressure on him to deliver something for everyone.
US President Donald Trump has been urging larger rate reductions, with proponents of looser policy pointing to the need to lift inflation toward the Fed’s target and thwart fallout from global trade tensions. And those trade worries played out again in currency markets, where the fall in China’s yuan to 7.0752 per dollar, its lowest since March 2008, promoted a rush to perceived safe-haven assets such as the Japanese yen.
Against the dollar, the yen advanced by 0.2% to 106.44 yen, nearing last week’s eight-month low of 105.05 yen. Currency traders said that while the Chinese economy’s slowing growth meant pressure had been building on the renminbi from long before, the new fall suggested Beijing was prepared to use the currency as leverage as trade tensions simmer.
This indicates that this is an instrument of the Chinese government in the trade war. It is allowing for renminbi weaknesses, said Thu Lan Nguyen, FX strategist with Commerzbank in Frankfurt. It is an indication that they are expecting the trade war to continue, to last longer than they anticipated last year. ============================
Trade woes slowing US economy
Japan manufacturing shrinks as export orders fall
WASHINGTON/TOKYO: Japanese manufacturing activity shrank for a fourth straight month in August as export orders fell at a sharper pace, a preliminary business survey showed on Thursday. But services sector activity expanded at the fastest pace in nearly two years, suggesting resilient domestic demand is continuing to offset some of the strong external pressures on the economy.
The Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) rose to a seasonally adjusted 49.5 from a final 49.4 in the previous month, but stayed below the 50.0 threshold that separates contraction from expansion for a fourth month. Factory output and total new orders contracted again, though at a slightly more moderate pace than in July.
Other key activity gauges in the PMI report offered a mixed picture. Employment expanded, while the backlog of work index rose to an eight-month high, though it remained in contraction.
A separate survey showed Japanese service activity expanded. That, in turn, helped lift a composite PMI index that includes both manufacturing and services. The Jibun Bank Flash Japan Services PMI climbed to 53.4 in August, from a final 51.8 in July on a seasonally adjusted basis, and the highest level since October 2017.
On the other hand, higher trade barriers, including President Donald Trump’s tariffs, are slowing the US economy and cutting household income, congressional budget experts warned, as Trump heads toward a 2020 election showdown with Democrats. The nonpartisan Congressional Budget Office said changes in US and foreign trade policies since January 2018 will reduce inflation-adjusted US gross domestic product by 0.3 per cent from what it would be otherwise by 2020. It also predicted that trade would reduce real income for the average US household by 0.4 per cent, or US$580.
CBO also projected a deeper federal deficit of US$960 billion (S$1.34 billion) for fiscal year 2019, which ends on Sept 30, due in part to higher government spending. The deficit is projected to top US$1 trillion next year – two years sooner than expected – and average US$1.2 trillion between fiscal years 2020 and 2029. CBO data showed that annual deficits over the next decade would average 4.7 per cent of GDP, the highest since 2012 and significantly higher than the 2.9 per cent annual average of the past 50 years.
Over the longer term, CBO forecast that federal debt held by the public would grow from 79 per cent of GDP in 2019 to 95 per cent in 2029. The projected impact of Trump’s trade policy contradicts White House claims that the US trade war with China has had no damaging effect on the US economy. Higher tariffs on a range of Chinese-made products are due to take effect on September 1. “Our Economy is sooo strong, sorry!” Trump said on Wednesday in a series of tweets that blamed recession fears on the “Fake News LameStream” media while pressuring the Federal Reserve to boost growth by cutting interest rates..