U.S. Futures And Global Equities Rise After Fed Move

U.S. stock-index futures and global equities rose after the Federal Reserve stepped up its assistance to the American economy, saying it would back lending to businesses and buy essentially unlimited amounts of government debt.

S&P 500 futures gained more than 3% in early afternoon trading on Tuesday in Hong Kong, suggesting U.S. shares could rise later in the day.



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Japan’s Nikkei 225 closed 7.1% higher, while South Korea’s Kospi rose more than 8%. A second day of sharp gains for SoftBank Group Corp. on a $41 billion asset-sale plan helped buoy the Nikkei. Benchmarks in Hong Kong, Australia, Shanghai, India and New Zealand also advanced.

On Monday, the Dow Jones Industrial Average fell about 3% after U.S. lawmakers failed for a second day to pass a rescue package to ease the blow from the coronavirus pandemic. U.S. stocks, however, pared earlier losses and investors took some solace from the Fed’s measures.

Sherwood Zhang, a portfolio manager at Matthews Asia, welcomed the Fed action. “Hopefully, the Fed’s latest move should be able to help tighten credit spreads globally, easing pressure on the cost of borrowing for corporations,” he said, adding that U.S. political gridlock mattered less internationally.

Mr. Zhang said he had used the recent market selloff to increase his holdings of high-quality stocks, including some consumer companies with long-term growth potential whose shares have been battered recently.

David Gaud, Asia chief investment officer and head of discretionary portfolio management at Pictet Wealth Management, said moves by the Fed and other central banks to keep interest rates low and ensure money was available for corporations were essential to prevent a complete economic meltdown.

“It’s moving in the right direction but it’s not sufficient,” to support world economies without decisive government action to address the economic fallout as well, he said. He said the longer the pandemic lasts, the greater its economic impact would be, in which case current fiscal and monetary policy responses might prove insufficient.

The global death toll from the novel coronavirus surpassed 16,000, with more than 367,000 confirmed cases. Cases in the U.S. alone grew 10-fold to cross 41,000 from a week earlier, as more state governors ordered residents to stay home. Meanwhile, the U.K. joined other European countries in lockdown under a raft of restrictions from the government.





The WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, eased 0.6% Tuesday to 96.42. On Monday, the index hit its highest closing level since 2002. The gauge was created in 2012 but back-calculated to 2001. Regional currencies including the Australian dollar, Korean won and Chinese yuan strengthened against the dollar.

The 10-year U.S. Treasury note, which is seen as a haven, declined in price. The yield on the note, which moves in the opposite direction of its price, rose about 0.045 percentage point to 0.812%, according to Tradeweb.

Brent crude, the global oil benchmark, rose 4.1% to $30.49 a barrel. Crude prices have plunged on worries about reduced demand and a price war between major oil producers.


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Federal Reserve Delivered A Half Percentage Point Rate Cut Tuesday, But Markets Slumped On The News

The Federal Reserve’s extraordinary rate cut Tuesday is likely only the first of multiple efforts to stem fear over the threat the coronavirus poses to global growth and financial markets.

No sooner had the U.S. central bank announced a half percentage point reduction than market participants began speculating about what was next. Wall Street broadly expects the Fed to follow up with another cut in a few weeks followed by more monetary easing in April.

In fact, if reaction from Tuesday’s move is any indication, it will take a lot more for the Fed to assuage heightened worries over a virus-induced threat to the longest expansion in U.S. history.

“The question from here is what further adjustments do they make,” said Bill English, former head of monetary policy for the Fed and now a professor of finance at the Yale School of Management. “The answer to that is when their outlook for the economy changes, it may be appropriate to do something more. That’s going to be a hard thing to communicate over the next few months.”

Markets, indeed, will be demanding more action even if the coronavirus damage doesn’t show up in the data.

fed-rates

A Powell letdown
Fed Chairman Jerome Powell sought to quell some anxiety Tuesday when, during a news conference after the cut, he said he and the Federal Open Market Committee are “prepared to use our tools and act appropriately, depending on the flow of events.”

The market didn’t like it, though, and sold off sharply during and after his comments.

One source of disappointment may have come when Powell indicated that he doesn’t foresee the Fed expanding its balance sheet through asset purchases — quantitative easing — in response to current conditions.

“What they should have done is said we’re going to do whatever it takes,” said George Selgin, director of the Cato Institute’s Center for Monetary and Financial Alternatives. “It’s the path forward that’s more important than the step taken immediately.”

The “whatever it takes” approach would echo then-European Central Bank President Mario Draghi’s promise in 2012 to pull out all the stops to address the Continent’s debt crisis. The pledge was widely seen as helping to stem a panic that the euro zone was about to sink into a deep recession.


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Selgin said the Fed should have taken a similar approach, with adopting just a quarter-point cut but with a vow that it would deploy all its tools to make sure the coronavirus situation doesn’t create greater havoc.

“It was fine for the Fed to act immediately. But the less it does now in the way of actual cuts and the more it signals its willingness to make further cuts if necessary with clear goals of what ‘necessary’ means, it would have been all the better,” he said. “For one thing, you don’t want to waste your ammunition.”

Cuts in March and April
Indeed, with Tuesday’s announced cut the Fed now only has another percentage point, or 100 basis points, left to go. And Wall Street expects the central bank not to waste time in using up that remaining space.

Both Citigroup and Bank of America Global Research expect the Fed to do at least 25 basis points more at the March meeting. BofA sees another similar reduction in April; Citi sees either 50 basis points in March or 25 basis points in each month.

“Further cuts may be more controversial as some on the committee will want to wait-and-see how the 50bp (and 75bp from last year) work their way through the economy,” Citigroup economist Andrew Hollenhorst said in a note. “But either soft data or tighter financial conditions will likely convince most to cut further.”

Communicating further action will be complicated.

Tuesday’s emergency reduction was met with a sharp rally on Wall Street that quickly evaporated. Major indexes suffered losses in excess of 2% and the benchmark 10-year Treasury note yield fell below 1% for the first time ever.



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A fearful Fed
While markets wanted policy easing, the execution didn’t go very well.

“The communication of this stuff is always hard. No one ever knows what markets are thinking and doing,” English said. “But partly the lack of [positive] effect today is that maybe people thought they learned that the Fed was more worried than they thought.”

Cleveland Fed President Loretta Mester entered the conversation later in the day, saying during a speech in London that she thought the cut would help but noted that actions from other officials, particularly on the fiscal side and in health care, “would likely do more to support confidence and spending by helping to contain the spread of the virus.”

She did not indicate whether she would support further easing.

That decision will come down to the evaluation of a number of factors that will go behind the stock market and economic reports, which operate on a lag and don’t always represent current conditions, said Lou Crandall, chief economist at Wrightson ICAP.

“They do need to see more evidence of actual concrete distractions to the business environment,” Crandall said. “If the contours of the virus impact on the U.S. economy become more clear, a rate cut won’t solve all our problems, but it will be helpful.”


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Fed Holds Rates Steady



⇑⇓ Today’s Stock Market Quotes ⇓⇑



The U.S. Federal Reserve on Wednesday held interest rates steady and signaled borrowing costs are likely to remain unchanged indefinitely, with moderate economic growth and low unemployment expected to continue through next year’s presidential election. The decision by the U.S. central bank‘s rate-setting committee left the benchmark overnight lending rate in its current target range between 1.50% and 1.75%.

New economic projections showed a solid majority of 13 of 17 Fed policymakers foresee no change in interest rates until at least 2021. The other four saw only one rate hike next year.


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Notably, no policymakers suggested lower rates would be appropriate next year, a sign the Fed feels it has engineered a “soft landing” after a volatile year in which recession risks rose, the U.S. bond yield curve inverted, and trade policy disrupted markets.

“The Committee judges the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the … symmetric 2 percent objective,” the Fed said in a policy statement after the end of a two-day meeting.

There were no dissents to the policy statement, the first without opposition since the April 30-May 1 meeting. In the midst of an ongoing U.S.-China trade war, Fed policymakers said they would continue monitoring “global developments” in deciding whether interest rates need to change. They also said they would keep an eye on “muted inflation pressures,” a reflection of concern that the pace of price increases has failed to hit the central bank’s target.

Fed Chairman Jerome Powell is scheduled to hold a press conference at 2:30 p.m. EST (19:30 GMT) to discuss this week’s policy meeting, the last of the year.

After the Fed’s October policy meeting, Powell said it would take a “material” change in the economic outlook for the Fed to change rates again. The Fed cut rates three times this year, including in October.

The quarterly economic projections released on Wednesday showed little change from those in September, as policymakers sketched out an economy they feel has skirted recession risks and is poised to grow close to trend for several years more.

A reference in the October policy statement to “uncertainties” about the economic outlook was dropped on Wednesday. Gross domestic product at the median is projected to grow 2% next year and 1.9% in 2021.

Unemployment is seen staying at its current level of 3.5% through next year, rising to only 3.6% in 2021. In a demonstration of the disconnect between that low level of unemployment and inflation, the pace of prices increases is expected to rise only to 1.9% next year.

“The labor market remains strong and … economic activity has been rising at a moderate rate,” the Fed said. It added, however, that business investment and exports remained weak.


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The economy will be a central issue in U.S. President Donald Trump’s reelection campaign against a Democratic challenger likely to call for different economic policies. Trump repeatedly criticized the Fed this year for not cutting rates faster and deeper.

The Fed’s forecasts offered little obvious fodder for either Democrats or Republicans, with the economy largely seen performing as it has – far short of the 3% annual growth Trump promised to produce, but also with historically low rates of unemployment.




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Global Stocks Rise… All Eyes on the Fed

{ Global Stocks – Stock Market News } …  • European, Asian stocks up • U.S. Treasury yields rise… Global stocks climbed at the end of a week dominated by central-bank policy, with a closely watched speech expected from Federal Reserve Chairman Jerome Powell later in the day.

The Stoxx Europe 600 opened 0.5% higher after a broadly positive session in Asia, with the U.K.’s FTSE 100 and the German DAX both up 0.6%.

Markets will be watching for clarity from Mr. Powell and other central-bank leaders at the Jackson Hole symposium on the likelihood of further interest-rate cuts and action to lift a stagnant global economy. He is set to speak Friday at 10 a.m. ET. Bank of England Gov. Mark Carney speaks later in the day.


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Analysts said the Fed chairman will have to show he is willing to take strong action to support the economy. Dallas Fed President Robert Kaplan said Thursday at the gathering of central bankers that he was open to cutting rates in September. The Fed’s July rate move lowered its benchmark rate to a range between 2% and 2.25%.

Friday’s rises in stocks came a day after a series of weak manufacturing data around the world had raised concerns about a possible recession, weighing on U.S. indexes.

Gains in Europe were led by technology firms, with the sector up 1.1%. Danish IT company SimCorp ’s shares climbed 6.3% after it raised its revenue guidance.


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Toronto-based Entertainment One’s shares jumped 29% after U.S. toy maker Hasbro said it would buy it for $4 billion.

The yield on 10-year Treasurys rose to 1.636% on Friday, from 1.613% on Thursday. Bond yields and prices move in opposite directions. In currencies, the pound fell 0.3% against the U.S. dollar to $1.2215. Sterling also fell against the euro by 0.2%.

The Dollar Index, which measures the currency against a basket of its peers, ticked up 0.1%. In commodities, global benchmark Brent crude gained 0.1% to $60.16 a barrel. Gold dropped 0.2%.




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First Trading Day Of August: U.S. Stock Futures Pause Following Fed Rate Cut


The Fed cut interest rates by 25 basis points on Wednesday — its first cut in more than a decade — citing “global developments” along with “muted inflation” as reasons for easing monetary conditions.

However, Chairman Jerome Powell told reporters in a news conference following the Federal Open Market Committee’s rate decision that the central bank’s rate cut was a “midcycle adjustment,” hinting that further rate cuts later this year were not a sure thing.

That comment led to a 333-point drop on the Dow, its biggest one-day drop since May 31. The S&P 500 and Nasdaq dropped 1.1% and 1.2%, respectively, to end July.

“It was always going to be a tough job for the Fed to be as dovish as stock markets hoped,” Chris Beauchamp, chief market analyst at online trading firm IG, wrote in a note. “The sense of disappointment was almost inevitable.”


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In off-hours trading, shares in chip maker Qualcomm fell 7% after it reported its earnings Wednesday and cut its full-year forecast for global smartphone sales. Prudential Financial ’s shares dropped 5.2% after the company posted a slight increase in adjusted operating earnings.

General Motors ’s shares rose 2.9% after the car maker reported second-quarter results that beat expectations. Shares in Verizon Communications rose 1.7% premarket after the company said it added more wireless customers than some analysts expected in its second quarter.

Siemens’s shares fell 4.7% after the German industrial giant reported a drop in its quarterly profit and said a weakening global economic environment was hurting its key industrial businesses.


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Royal Dutch Shell ’s shares slid 5.5% after the energy giant said its profit fell. The company cited lower oil and gas prices and weaker refining margins, outweighing a rise in production.

In Asia, both China’s benchmark Shanghai Composite Index and Hong Kong’s Hang Seng fell 0.8%. The latest round of U.S.-China trade talks concluded Wednesday without any compromise, though both sides described the talks as constructive. The next round will be held in September.

U.S. stocks fell Wednesday after Fed Chairman Jerome Powell disappointed investors when he rolled back expectations for future interest-rate cuts…

The 10-year U.S. Treasury yield edged down Thursday to 2.020%, from 2.034% Wednesday. Yields rise when bond prices fall. The WSJ Dollar Index, which measures the currency against a basket of its peers, climbed 0.2%.

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In commodities, global benchmark Brent crude fell 1.3% to $64.23 a barrel. Gold dropped 1.5%. The British pound was down 0.4% against the dollar on Wednesday, hovering near historic lows. The Bank of England on Wednesday left interest rates unchanged.

The real worry is the strength of the pound,” Kerstin Braun, president of international trade-finance firm Stenn, said in a note. “Regardless of the Bank of England’s actions, there will still be a downward pressure on sterling.”


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A lower pound rate will benefit U.K. exporters, but the bigger impact across the board is likely to be in raised prices for consumers on imported items such as food and fuel, Dr. Braun said. Data on U.S. manufacturing are also expected Thursday.

Federal Reserve Chairman Jerome Powell Set The Stage For The Central Bank To Cut Interest Rates



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Jerome Powell set the stage for the central bank to cut interest rates to bolster flagging growth. The S&P 500 and the Nasdaq Composite touched all-time highs, with the S&P briefly eclipsing the 3000 level for the first time. The indexes were up 0.6% and 0.7% in recent trading, respectively. The Dow Jones Industrial Average climbed 0.6%, on track to snap a three-day losing streak.

“Now everybody is really confident that the Fed is going to cut rates at the July meeting,” said Shana Sissel, senior portfolio manager for CLS Investments, an Omaha, Neb., firm that manages about $10 billion. “That’s put a lot of people’s minds at ease.”

Major U.S. indexes had faltered in recent days as investors weighed an economic slowdown against the odds the Fed will bolster the economy by cutting interest rates. Mr. Powell’s testimony prepared for the House Financial Services Committee was released before Wednesday’s opening bell, and signaled that the Fed will likely cut rates later this month.

Mr. Powell said the economic outlook hasn’t improved in recent weeks, and “it appears that uncertainties around trade tensions and concerns about the strength of the global economy continues to weigh on the U.S. economic outlook.”

Traders have largely been treating good economic news as bad news while they wait on the Fed’s decision. Gloomy economic data gives central bankers a reason to intervene to forestall a slowdown.

Federal-funds futures, used by investors to bet on central-bank policy, show a 21% chance that the Fed will cut rates by half a percentage point at its July 31 meeting, up from 3.3% yesterday. The odds of a quarter-point cut stand at about 79%.

The yield on 10-year U.S. Treasurys fell to 2.047% from 2.058% on Tuesday. Yields and prices move in opposite directions. The S&P 500’s crossing of the 3000 threshold has taken nearly 5 years. It broke through 2000 for the first time in August 2014.

Energy and technology stocks led the index higher. Micron Technology Inc. rose 4.3% to $43.13 a share and Seagate Technology PLC gained 2.9% to $47.39 a share.

Energy companies got a boost from rising oil prices after U.S. industry group American Petroleum Institute on Tuesday showed a sharp drop in oil stocks. U.S. oil futures rose 3%, or $1.77 a barrel, to $59.60. Natural gas gained 2% to $2.47 per million British thermal units. Oil and gas producer Noble Energy Inc. was up 2.7% to $22.10 a share.

While the markets clearly welcomed signs of a rate cut, not everyone is convinced that the Fed should act now. Last week’s stronger-than-expected jobs report runs counter to fears of a slowdown, and last month’s trade cease-fire between the U.S. and China has lessened one drag on the economic picture, Ms. Sissel said.

“We have a lot of positives going on right now, and I don’t think the Fed should use this bullet,” Ms. Sissel said. “They should save it for when they need it.” Rep. Carolyn Maloney (D., N.Y.) asked Mr. Powell whether last week’s strong jobs report for June had changed the picture.


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“The straight answer to your question is no,” Mr. Powell responded. He pointed to economic data, particularly in Europe and Asia, that has “continued to disappoint.” A detente between the U.S. and China also isn’t definitive.

“While that’s a constructive step, it doesn’t remove the uncertainty that we see as overall weighing on the outlook, “ Mr. Powell said. Europe’s pan-continental Stoxx Europe 600 wavered between gains and losses.

Data showed the British economy returned to growth in May, reversing a two-month slowdown and easing fears of a contraction in the second quarter. A 24% rise in car production drove the uptick, as auto makers restarted factories they had idled in anticipation of Brexit, which was originally scheduled to take place in April.

However, analysts cautioned that the broader economic picture in the U.K. remains subdued, despite the improvement in manufacturing.


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“Recent PMIs indicate that the service sector—which makes up the lion’s share of the U.K. economy—has struggled to regain momentum amid mounting Brexit uncertainty,” said James Smith, ING developed markets economist, adding that he expects business investment to resume its downward trend over the summer.

Aside from the Fed’s policy outlook, Peter Dixon, senior economist at Commerzbank, said investors will be eager to see how Mr. Powell responds to a grilling from lawmakers over concerns that his independence is being undermined by pressure from President Trump, who has criticized him for allowing the dollar to become too strong.


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Minutes from the central bank’s recent policy meeting are due for release later Wednesday, which could provide additional detail on how officials viewed the economic environment.

Asian markets mostly closed higher, although Shanghai-listed stocks slipped after Chinese consumer inflation held steady in June. The consumer-price index rose 2.7% on year, in line with expectations, as slowing nonfood prices offset faster gains in food prices.

…Big Banks… Annual Stress Test: Year’s Recession Scenario Included A Jump To 10 Percent Unemployment And Falling Real Estate Prices

The 18 largest banks operating in the United States took the first step toward doling out capital on dividends, share buybacks and other investments on Friday, after clearing the first stage of their yearly health checks with the U.S. Federal Reserve that assess their ability to weather a major economic downturn.


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The central bank said lenders, including JPMorgan Chase & Co (NYSE:JPM), Citigroup Inc (NYSE:C), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Bank of America Corp (NYSE:BAC), would face losses of $410 billion under its most severe recession scenario ever, but levels of high-quality capital would still be well above regulatory minimums.

“The nation’s largest banks are significantly stronger than before the crisis and would be well-positioned to support the economy even after a severe shock,” Fed Vice Chairman Randal Quarles said in a statement.

The Fed said hypothetical losses were broadly comparable to results from prior years, with the most significant loan losses seen in credit cards, followed by commercial and industrial loans.



Friday’s results, the first of the two-part annual “stress test,” showed the country’s biggest lenders could meet minimum Fed standards based on information they submitted to the regulator.

But banks could still stumble next Thursday, when the Fed announces whether it will permit banks to dish out dividends and buy back shares. That second test is more rigorous, assessing whether it is safe for banks to implement their capital plans. It also reviews operational controls and risk management.

All eyes are on Deutsche Bank (DE:DBKGn), which is bracing for potentially its fourth flunking in five years amid ongoing turmoil in its U.S. operations, Reuters reported on Thursday. Last year, the Fed failed the bank, citing “material weaknesses” in its data capabilities and capital planning.

The Fed created the stress tests during the 2007-2009 financial crisis to ensure banks are strong enough to continue lending through a severe economic downturn.

This year’s tests are more streamlined following a Fed review of the process, which has long been hated by the industry. Roughly half as many banks were tested this year compared to 2018 after the Fed earlier this year moved several smaller firms onto a two-year testing cycle. The 18 banks tested this year hold roughly 70 percent of all U.S. bank assets, according to the Fed.

In addition, most banks can no longer fail on “qualitative” grounds. Previously, banks that had sufficient capital could still be flunked if the Fed identified risk management and operational problems.

In March, the Fed said it was dropping this qualitative objection for domestic U.S. banks. Only the U.S. subsidiaries of five foreign lenders — Deutsche Bank, Credit Suisse (SIX:CSGN) Group AG, UBS Group AG, Barclays (LON:BARC) Plc and TD Bank — must clear that hurdle this year.


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Since the first test in 2009, banks have seen losses shrink, loan portfolios improve and profits grow. The largest banks have also strengthened their balance sheets by adding more than $680 billion in top-tier capital, the Fed said.

This year’s recession scenario included a jump to 10 percent unemployment, as well as elevated stress in corporate loan markets and falling real estate prices. However, the Fed also this year gave banks more information about the testing models, after years of industry gripes that the process is too opaque.

The Fed’s Meeting Is The Big Deal For Markets In The Coming Week

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The Fed is expected to hold interest rates steady, but it is also expected to issue a new forecast with fewer rate hikes and a slower economy. The Fed also is likely to announce the end of its operation to unwind its balance sheet, but economists are divided on which month this year it will actually end the program.

Stocks surged in the past week with the best performance since November for the S&P 500, which ended up 2.9 percent. At the same time Treasury yields, which move opposite price, continued to fall. The bench mark 10-year Treasury slipped below 2.60 percent Friday, its lowest yield since June 4, and the 2-year was at 2.43 percent.


 


The fact that both markets are rising at the same time is somewhat unusual, and at some point the trend could break in favor of one market versus the other. An easier Federal Reserve, meaning one less inclined to drive up rates, is viewed as a positive for stocks because higher interest rates can slow the economy and send borrowing costs higher for companies and investors. Bond yields also head lower when the Fed is not likely to raise interest rates.

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“This could be an interesting week,” said Art Hogan, chief market strategist at National Securities. He said it should be positive for stocks if the Fed reduces its forecast for rate hikes and delivers on expectations. “This is the meeting where we get more clarity on the balance sheet reduction. Both those things would be an affirmation of where things are right now. It’s also technical…where we close [on the S&P] puts us on a precipice of breaking out,” said Hogan.

The S&P 500 closed at 2,822, near the key 2,825 level which is the upper end of a big band of resistance. “The only down week of the year was the week before this, and the trend has been higher,” he said. But Paul Christopher, Wells Fargo Investment Institute chief international investment strategist, said the stock market could actually have little reaction to the Fed because Fed officials have been very dovish in public comments.

“It could be neutral or perhaps even negative. What more can they say? You might see some people selling the fact,” he said. Christopher said he sees the market as stretched, and it could sell off. But then, there could be a buying opportunity. “We think stocks have to start to feel better about the economy first,” he said, adding a trade deal with China could be a positive.

The Fed’s actions could also already be priced into the bond market, according to George Goncalves, head of fixed income strategy at Nomura. He said what really matters is what risk markets, or stocks, do in response. “There’s scope for risk to do better and the Fed’s not hiking. You can see it rally into the summer and the economy will look better and if that happens that will be a buying opportunity for rates,” he said.

Economists see the Fed reducing its forecast for two rate hikes to one or even none for this year. They also expect it to say it will end its program to reduce the balance sheet, but they don’t agree on whether that happens in June, September or closer to the end of the year.

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The Fed is currently reducing its balance sheet by allowing securities to roll down as they mature, instead of replacing all of them as it previously did. It now theoretically could allow $60 billion a month to roll off, but Fed officials could change that program and begin to repurchase securities to replace them.

The markets are also waiting to hear if the Fed will focus solely on Treasury securities, and at what part of the curve – or duration. In the past it had purchased mortgages but is expected to discontinue that.

“We think they’re back to buying Treasurys by Oct. 1. Somethings got to give. At some point, its either that [bond market] people are too pessimistic and the economy is going to do well because the Fed is behind the curve, or we have another kind of correction on our hands in the next six to nine months,” he said. “We just have to pass through time There’s a powerful faith-based system around easy money can fix all things.”

Swonk said she expects the Fed to continue to forecast one rate hike for this year. The Fed interest rate forecasts appear as anonymous dots from individual Fed officials on a chart, known as the “dot plot.”

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Even so, she doesn’t expect the Fed will actually raise rates but it will continue to give itself flexibility. Economic data has been mixed with some very poor reports, like December’s retail sales, which fell 1.6 percent, and February’s jobs report, which showed job growth of just 20,000 jobs, 160,000 below forecast. “I think they have to walk a fine line between acknowledging the weakness we’ve seen and then also show that we’re still going to see growth this year,” she said.

What to Watch

Monday

8:30 a.m. Business Leaders survey

10:00 a.m. NAHB survey

Tuesday

FOMC begins 2-day meeting

10:00 a.m. Factory orders

Wednesday

2:00 p.m. Fed statement

2:30 p.m. Fed Chairman Jerome Powell briefing

Thursday

8:30 a.m. Jobless claims

8:30 a.m. Philadelphia Fed survey

8:30 a.m. Q4 current account

10:00 a.m. QSS

10:00 a.m. Existing home sales

Friday

9:30 a.m. Atlanta Fed President Raphael Bostic

9:45 a.m. Manufacturing PMI

9:45 a.m. Services PMI

10:00 a.m. Wholesale trade

Investors Scale Back Inflation Bets

A widely tracked measure of inflation expectations is mired below 2% even in a tight U.S. job market


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Bets on a pickup in inflation are falling out of favor, underscoring investors’ skepticism that the U.S. economy will be able to stage a rebound after a soft start to the year.

The growth outlook has dimmed over the past year as measures of manufacturing activity, consumer spending and business confidence have waned. The cool-down in the economy helped keep inflation from running past the Federal Reserve’s 2% target for a seventh straight year in 2018.



The fact that inflation has continued to undershoot targets has allowed the Fed to suggest it will pause its rate-increase campaign, helping the S&P 500 rise 12% in 2019 and notch its best two-month start to the year in decades. But many bond investors have taken a more pessimistic view, questioning whether muted price increases are another sign that prospects for the economy and earnings are dimming.

Investors will get another look at where inflation is headed on Friday, when the Labor Department publishes its monthly jobs report. “I’m in the camp of those who are doubtful,” said Zhiwei Ren, managing director and portfolio manager at Penn Mutual Asset Management.

Mr. Ren said he bought Treasury inflation-protected securities in 2017 but wound down purchases last year and believes he won’t buy much, if any, this year. TIPS offer yields—albeit relatively small ones—that rise together with inflation, making them most desirable to investors when they believe prices across the economy are heading higher.

“I thought 2017 would be a good year because that’s the year we all talked about synchronized global growth,” Mr. Ren said. “But we didn’t see [inflation], and now, all the data shows a slowdown.”


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A widely tracked measure of investors’ expectations for average annual inflation over the next decade, known as the 10-year break-even rate, has remained below the Fed’s 2% target in 2019. Measured by the gap between yields on the 10-year Treasury note and 10-year TIPS, the break-even rate was at 1.95% on Thursday. That is up from recent lows in December but still below the four-year high of 2.18% hit in May, according to FactSet.

Demand for other products that hedge portfolios against inflation has also waned in recent months. The Schwab U.S. TIPS exchange-traded fund is on track to post a quarterly outflow for the first time since 2013, according to Lipper. And surveys show investors are growing increasingly doubtful that the economy will heat up. Among global fund managers surveyed by Bank of America in February, 55% expected below-trend growth and inflation over the next year, the highest share since December 2016.

Few—including Mr. Ren—believe that the U.S. is on the brink of recession. The unemployment rate remains near multidecade lows. For 100 consecutive months, the labor market has added more jobs than it has lost. Wages have risen at least 3% on a year-over-year basis for six straight months, and data Thursday showed gross domestic product rose more than expected in the final quarter of 2018. In the past, these factors—especially low unemployment—would have prompted investors to fret about inflation.

Yet a tight labor market hasn’t been enough to keep inflation running consistently at the Fed’s 2% target. That has stirred debate among economists about whether factors like the diminishing power of unions and globalization have created an environment in which inflation is likely to stay muted. One factor that could change the picture: the Fed.

In recent months, Fed officials have begun publicly discussing potential changes to how they define their inflation target. One approach would have the Fed aim for an average of 2% inflation over several years, meaning it would deliberately seek modest overshoots of the 2% target during good times to make up for falling below target during recessions. Officials have said they won’t make any changes before early next year.


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“These are incredibly dovish concepts, a complete change in the response function of the Fed,” said Matt Toms, chief investment officer of fixed income at Voya Investment Management. “It’s suggesting the Fed won’t immediately respond to kill inflation.”

Traders have begun pricing in a small chance of the Fed lowering short-term interest rates this year, a move that could help nudge inflation higher by lowering the cost for businesses and households to borrow and invest. Federal-funds futures, which track market-based expectations for monetary policy, showed Wednesday a 20% chance of the Fed lowering rates by year-end, according to CME Group. That compares with around 4.1% at the start of the year.

So far, though, there are few signs of investors positioning for an uptick in growth and a corresponding boost to inflation. The 10-year Treasury yield, used as a reference rate for everything from mortgages to auto loans, has drifted along in a relatively narrow range this year after reaching multiyear highs above 3% in 2018. The 10-year yield tends to rise when investors are confident about growth and retreat when they are less sure about the economic outlook. Yields rise as bond prices fall.

Mutual funds and exchange-traded funds tracking equities have also logged steep outflows, while those offering investors exposure to bonds are posting net inflows so far in 2019, according to a Bank of America analysis of EPFR Global data.

That pattern suggests that investors aren’t convinced that the economy is about to heat up. Inflation tends to make Treasurys less attractive to investors, since it chips away at the purchasing power of their fixed payouts. “The Fed can do everything they try to do to increase inflation expectations, but the market is doubtful they can achieve that,” Mr. Ren said.


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New York Fed President John Williams Says New Economic Outlook Necessary For Rate Hikes


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New York Fed President John Williams on Tuesday said he was comfortable with the level U.S. interest rates are at now and that he sees no need to raise them again unless economic growth or inflation shifts to an unexpectedly higher gear.

In an interview with Reuters, Williams estimated the Federal Reserve would continue trimming its bond portfolio well into next year. He also said he felt rates had reached his current view of a lower “neutral” level, with growth and unemployment leveling off and inflation, if anything, a bit weaker than hoped.

Asked if it would take some sort of shock to resume rate increases, he said it would require one or more of those factors to surprise to the upside.



“I don’t think that it would take a big change, but it would be a different outlook either for growth or inflation” to return to hiking rates, Williams, one of the Fed’s three vice chairs and a key voice on rate policy, told Reuters.

Williams’ comments, made just weeks after the U.S. central bank paused its once quarterly rate hikes, underscore just how high the bar would be for tighter monetary policy, and suggest that such a move may not come anytime soon. The Fed could also keep levels of bank reserves on its books that are far closer to current levels than previously thought, Williams said.


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Along with its rate-hike holiday, Fed policymakers are finalizing plans on how they would end the reduction of their balance sheet, which includes holdings of bank reserves bulked up in part by the Fed’s need for cash to buy bonds to halt the global financial crisis a decade ago.

Williams estimated the so-called balance sheet rolloff could end when bank reserves get to “maybe $1 trillion of reserves or somewhat more than that,” about $600 billion less than current levels. The figure is “a guess today of the amount of reserves that will be held in the system in the future – but again we are learning and will get a finer touch on that,” he said.

That view implies the runoff would continue at least into next year at its current pace. At least two Fed policymakers have said the Fed could stop making changes to the portfolio this year.

Williams, who is vice chairman of the rate-setting Federal Open Market Committee and votes when that group meets, said policymakers are “in a very good place,” with rates around neutral, the U.S. economy growing and price pressures subdued.

“Monetary policy is where it should be,” he said. “It’s around my view of what neutral interest rates are.” After Williams’ remarks, stocks pared gains into the market close Tuesday afternoon, with the S&P 500 ending up 0.15 percent. Yields on U.S. Treasury bonds fell. Benchmark 10-year notes fell to 2.64 percent from a high near 2.68 percent earlier in the day.

After its most recent meeting, Fed policymakers signaled their three-year drive to tighten monetary policy may be at an end due to a cloudy U.S. and global economic outlook as well as impasses over trade and government budget negotiations. Further details on the policy meeting at the end of January are expected when the Fed releases records from its deliberations on Wednesday.

The Fed increased interest rates three times in 2017 and four times last year, pushing them up to between 2.25 percent and 2.5 percent at its final 2018 meeting in December. The central bank’s balance sheet ballooned to over $4 trillion in the wake of the 2007-09 recession but policymakers began trimming bond holdings in the final months of 2017.


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2019 Stress Test Scenario: Big Banks Must Show The Fed They Can Survive A Hypothetical Scenario With Enough Capital To Continue Lending


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Stress Test Big Banks: The Fed’s latest “severely adverse” scenario imagines unemployment rising by six percentage points to 10%


By Annie Lekmayers | StockMarketNews.Today | lek.ale.annie@gmail.com

The Federal Reserve on Tuesday said that its stress test for big banks will imagine a rapid increase in unemployment, as it announced the details of the hypothetical scenario that banks must survive to pass the latest round of the exams.

The Fed’s latest “severely adverse” scenario imagines unemployment rising by six percentage points to 10%, along with stress in corporate lending and commercial real-estate markets. “The hypothetical scenario features the largest unemployment rate change to date,” said Randal Quarles, the Fed’s vice chairman for supervision, in a written statement. “We are confident this scenario will effectively test the resiliency of the nation’s largest banks.”

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Big banks must show the Fed they can survive the hypothetical scenario with enough capital to continue lending. If they fail, they face restrictions on payouts to shareholders. Test submissions are due in April and the results will be announced by the end of June, the Fed said.

The 2019 scenario generally applies to banks with more than $250 billion in assets, the Fed said. Smaller firms that completed the test last year won’t have to take the test again until next year, under new rules.

The Fed also announced Tuesday it has completed steps to boost the transparency of the models it uses to evaluate banks in the stress-test scenarios, giving banks a better idea of their chances at passing or failing. Specifically, the Fed said it would publish information about how hypothetical loan portfolios would fare under the tests, based on its internal models.

“The changes are intended to improve public understanding of the program while maintaining its ability to independently test large banks’ resilience,” the Fed said in a statement. The information will be published in the first quarter, before the tests are run.


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The Fed is also considering other changes that would ease the stress testing process, including giving firms their results before they wrap up shareholder-return plans.

Big banks must pass the Fed’s stress tests to be able to make shareholder payouts, although the timing of the test results means banks set those plans before knowing how they performed.



 

Measuring inflation. How do you measure the effect of inflation on your savings? The government measures it for you and publishes the results regularly


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Inflation occurs as demand for goods and services grows. As the total money supply in an economy rises, there is likely to be more demand for goods and services from consumers. As more people buy more goods, sellers hike their prices.

Inflation is caused by other factors, many of them temporary and limited in their scope.


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How do you measure the effect of inflation on your savings? The government measures it for you and publishes the results regularly. The Consumer Price Index (CPI) tracks the prices of a variety of consumer goods and services, including transportation, medical care, and housing. The index is published monthly.

Believe it or not, inflation can be too low. In the wake of the 2008 financial crisis and the great recession, the central banks in the U.S., Japan, and Europe were worried that inflation could, essentially, go below zero, meaning deflation, or falling prices. In fact, the U.S. did experience deflation in house prices lasting several years in many markets.

During the worst of the crisis, the Federal Reserve targeted a 2% annual growth in inflation to return the economy to health. The bank initiated various stimulus measures that were intended to boost the economy and encourage job creation, therefore putting more money in consumer’s hands.

Back in the late 1970s, the Fed was fighting double-digit rates of inflation. Economists will probably never stop debating whether the Fed’s measures, in the 1970s or the 2000s, were the right ones.

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How to Safeguard Your Income. If you are a retiree who gets a Social Security payment, you may see an increase in your monthly check from one year to the next, as the government adjusts the payment based on the cost of living as measured by the Consumer Price Index.

However, that increase requires approval by Congress. An increase of 2.8% was approved for 2019, and an increase of 2% for 2018. But the increase was .3% for 2017, and zero for 2016. Those numbers were based on the Consumer Price Index, but advocates for retirees argued that price categories that most affect the elderly, such as health costs, rose more rapidly than the overall index.



How to Safeguard Your Savings. The primary way to beat the effect of inflation is to invest your savings for a better return than you can get in money market accounts or savings accounts.

Investing in virtually anything else inevitably involves greater risk that an FDIC-insured account. But you can choose investments that have a level of risk that you can tolerate.

For example, retirees might want to consider Treasury Inflation-Protected Securities, or TIPS. These securities adjust the interest payouts you get based on changes in the CPI, and the principal payment you get back also will be adjusted for inflation. Even if prices go down over your investment period, you will at least get back your original principal.

Returns on stock investments generally tend to beat inflation. Investors who want to avoid the volatility associated with individual stocks might opt for mutual funds, which are professionally managed and aim to provide a good return over time.

A mutual fund that follows a passive indexing approach might be even better since it is not dependent on the stock-picking abilities of any particular fund manager. The stock market overall tends to go up over time. You will also pay less in fees with an indexing approach.


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The Bottom Line. Inflation tends to cut into a consumer’s purchasing power over time. Fortunately, there are ways of you can preserve the purchasing power of your savings. That means investing, but keeping your level of risk moderate.

U.S. stocks have dropped sharply in recent weeks on concerns over weaker economic growth. Trump has largely laid the blame for economic headwinds on the Fed


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President Donald Trump reiterated that the U.S. Federal Reserve was raising interest rates too quickly but added that U.S. companies were “the greatest in the world” and presented a “tremendous” buying opportunity for investors.

“They’re raising interest rates too fast because they think the economy is so good. But I think that they will get it pretty soon,” Trump told reporters in the Oval Office, referring to the U.S. central bank.

“I have great confidence in our companies. We have companies, the greatest in the world, and they’re doing really well. They have record kinds of numbers. So I think it’s a tremendous opportunity to buy,” Trump said after speaking with U.S. troops deployed abroad via video conference.

U.S. stocks have dropped sharply in recent weeks on concerns over weaker economic growth. Trump has largely laid the blame for economic headwinds on the Fed, openly criticizing its chairman, Jerome Powell, whom he appointed.


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Media reports have suggested Trump has gone as far as discussing firing Powell, and he told Reuters in August that he was “not thrilled” with the chairman. On Monday, Trump said “The only problem our economy has is the Fed.”


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All three major U.S. stock indexes ended down more than 2 percent on the day before the Christmas holiday. The S&P 500 has lost about 19.8 percent from its Sept. 20 closing high, just shy of the 20 percent threshold that commonly defines a bear market. The Fed hiked interest rates again last week, as had been widely expected.

Treasury Secretary Steven Mnuchin on Monday hosted a call with the president’s Working Group on Financial Markets, a body known colloquially as the “Plunge Protection team,” which normally convenes only during times of heavy market volatility.


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But the call did more to rattle markets than to assure them. Regulators on the call said they were not seeing anything out of the ordinary in financial markets during the recent selloff, according to two sources familiar with the matter.

As fear rises on Wall Street, strategists warn the worst is yet to come. The CBOE Volatility Index jumped above 30, its highest since the major market sell-off in February of this year


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Greed and Fear in Stock Market

As fear rises on Wall Street, strategists warn the worst is yet to come. After the Federal Reserve spooked markets Wednesday, risk assets and stocks have been reeling, with some of the sharpest losses on Thursday in growth sectors like biotech and technology.

That weighed hard on the Nasdaq, which closed down 1.6 percent after falling temporarily into a bear market, down more than 20 percent from its recent high during most of the day. The Dow fell 454 to 22,859, closing below he psychological 23,000 level, and the S&P 500 was off 1.6 percent at 2,467, or 16 percent from its highs.

The CBOE Volatility Index jumped above 30, its highest since the major market sell-off in February of this year. It was at 28.53 in late trading. “The market’s in no man’s land,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group. Stocks have broken through the lows of the year, and technicians are scurrying to find the next support levels. On the S&P 500, he said 2,400 is a potential psychological area of support.

The market plunged Thursday against the backdrop of a congressional feud with the White House over a continuing budget resolution, but the markets were more focused on the worries that have been festering over global growth and the potential for recession.

“You can guarantee if the government shuts down it’s going to very soon reopen,” said Boockvar. “This could be a carry through from yesterday, that’s legitimate. The problem now is this is the first time in years in this bull market that people are doing tax-loss selling. That’s helping to exaggerate the move. You’re also having redemptions.” Since the Fed announced its rate hike Wednesday, the Dow was down 815 points.

The sharp drop in stocks since early October was unexpected and even more crushing recently, since December is typically a positive time for stocks. The 10 percent decline so far in the S&P 500 is its worst December performance since 1931. If it remains this way, it would the first time ever that December is the worst month of the year for the index.

“It is entirely possible that looking out over the next three to six moths this correction turns into what you would call a bear market because of the fact that the Fed really didn’t show sufficient sensitivity to the affect of policy tightening on the speed of asset price changes to the downside,” said Julian Emanuel, chief equity and derivatives strategist at BTIG.



Emanuel said he’s not yet worried about a recession, but fears the Fed will make a policy mistake that could bring one on.

Trade war turnaround?. But the Fed is not the only worry. Also topping the list is the uncertainty surrounding the trade negotiations between the U.S. and China. The Chinese economy is already weakening, and investors worry weaker global growth will spread to the U.S., where the housing sector has begun to show weakness as the Fed raised interest rates.

“From our point of view time wise, we think this correction has further to run, consistent with the past over 10 percent corrections since March 2000,” Emanuel said. “Does it have further to run? That will be much more dependent on whether the data starts turning down in a much more meaningful way, and if there’s no signs of tangible … progress in negotiations with China.”

He added that the broader problems with China could continue but there’s still potential for a trade deal before the March deadline, which could appease markets.

Another big concern is a major slowdown in earnings growth. Market consensus is for 7.5 percent growth in 2019 in S&P 500 earnings, down from more than 20 percent this year. Ed Keon, QMA chief investment strategist and portfolio manager, said his forecast is even more negative — at zero growth.

“How I interpret the market action yesterday and today, I think it basically means the market’s convinced it’s already too late for the Fed. We already have rates that are high enough to push us into at least a growth recession,” he said.

Keon is also concerned about trade. He said when the market turned higher Dec. 3 after President Donald Trump’s meeting with Chinese President Xi Jinping, he began lightening up on stocks, and continued to sell into rallies. Stocks ultimately sold off on trade concerns even though the two sides have agreed to hold off on any new tariffs for 90 days and China has made some purchases of U.S. soy beans.

“We remain cautious. We think the market could get worse before it gets better. I still expect a positive year next year, but maybe something like 5 percent. You can get 2 percent in cash, without the volatility. … So far we’ve been selling into rallies and whether we continue to do that, we’ll have to see what the options look like,” said Keon.

He said he was a net seller Thursday, as well and he expects big investors to slow down their activities next week in what’s usually an illiquid time between Christmas and New Year’s. “We’re much more cautious. I’ve usually been bullish most of my career,” Keon said. He said the market will bottom once everyone becomes sufficiently negative. “We may not be that far away. I don’t think it’s going to get that much worse.”

Michael Arone, chief investment strategist at State Street Global Advisors, also sees more selling ahead and he recommends moving to the safer parts of the stock market, like the S&P aristocrats that have consistently increased their dividends.

“We need to see a bit more of a washout. We’re getting closer to those level but I think the holidays will interrupt, and we’ll have to see what happens when we regroup in January,” he said. “Admittedly, I think the end of the bull market may be on the horizon, but I still think fundamentals will support reasonably high stock prices in 2019. But we shall see.”

Arone expects earnings growth to slow as well, but to single digits.

“I definitely think the market is trading on sentiment. Underlying fundamentals are still reasonably OK, and I think that the negative sentiment is feeding on itself to a large degree, so selling begets more selling,” he said. “We’re seeing a reluctance to come in and buy on the dips. That has supported this bull market for the last 10 years. That’s something we’re observing from investors. … But I still think this is a kind of normal correction.”

Arone said one of his concerns is trade is just one source of friction between the U.S. and China, and a solution could take much longer to find.

“If this is a broader battle between two superpowers for global influence, it’s a whole can of worms,” he said. “I think what’s happening is the market’s not sure of what that looks like going forward and therefore, they’re reflecting that in lower asset prices until they know whether this is trade or something bigger.”

Arone said the Fed has also made itself a bigger problem for stocks, and he says investors should steer clear of growth and momentum names and look for higher quality value.

Federal Reserve Chairman Jerome Powell confused markets Wednesday with the Fed’s forecast for lower growth but commitment to continue tightening, said Arone. That comes after Powell’s previous pivot from a comment that the central bank was far from neutral to a statement that it was near neutral, just a month later. Neutral is the rate where the Fed is no longer seen as being accommodative and where it could stop raising interest rates.

“He was very steadfast on the fact that interest rates will continue to rise, and we’re on autopilot on the balance sheet. Yet they’re concerned about global risks,” Arone said. “It’s like speaking out of both sides of your mouth. Investors are looking for clarity, not confusion. … It seems the more he talks, the more confusing it is. Maybe less is more.”

Emanuel said the market has worried that Fed tightening, both through rate hikes and its balance sheet roll-off, are becoming a problem for risk assets and growth.



Powell said Wednesday, after the Fed hiked rates by a quarter point, that the Fed’s balance sheet program was on auto pilot, meaning it would continue to allow $50 billion of Treasury and mortgage-backed securities to roll off each month, as they reach maturity. The Fed has tapered the amount of securities it replaces, thereby shrinking its balance sheet.

“The market has not cared at all about the balance sheet reduction and about a week or two ago, it started caring about the balance sheet reduction because the belief was policy was becoming overly tight,” Emanuel said.

The Federal Reserve nudged up short-term interest rates for the fourth time this year, defying pressure from President Trump.


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The Federal Reserve nudged up short-term interest rates for the fourth time this year, defying pressure from President Trump, but suggested it could slow the pace of increases next year in the face of new headwinds.

Fed officials voted unanimously Wednesday on the increase, which will bring the benchmark federal-funds rate to a range between 2.25% and 2.5%, the ninth such rise since December 2015. They also indicated they think they won’t need to raise rates as much next year as they had anticipated three months ago.

Stock markets, which had recorded their largest two- and four-week declines heading into any Fed rate increase, fell after Wednesday’s decision. The Dow industrials slid 352 points, or 1.5%, to close at 23324, after falling as many as 513 points while Fed Chairman Jerome Powell spoke. The index had been up about 300 points just ahead of the rate decision.

The yield on the benchmark 10-year U.S. Treasury slumped to 2.782%, down from about 2.830% before the Fed’s announcement and its lowest level since May. Bond yields fall as prices rise and have slipped lately since last month when they settled at their highest level since 2011.

The declines unfolded during a news conference in which Mr. Powell said officials expected the economy would be strong enough next year to justify two more rate increases.

“We have seen developments that may signal some softening, relative to what we were expecting a few months ago,” he said, pointing to the slowing global economy and increased market volatility that is less supportive of growth. “In our view, these developments have not fundamentally altered the outlook.”

The backdrop for the Fed’s two-day policy meeting was among the most unusual in recent history. The Republican president continued his monthslong public criticism of the central bank in the days leading up to the meeting, urging the Fed not to raise rates in statements on Twitter. “Don’t let the market become any more illiquid than it already is,” Mr. Trump said Tuesday. “Feel the market, don’t just go by meaningless numbers.”

Mr. Powell repeatedly said political pressure would never influence the Fed’s decisions. “Political considerations have played no role whatsoever in our discussions or decisions,” he said. “Nothing will deter us from doing what we think is the right thing to do.”

Even though the Fed signaled a less aggressive rate path, markets had been looking for signals it might be done raising rates, which Mr. Powell didn’t offer. He also said the Fed was committed to steadily letting its crisis-era holdings of Treasury and mortgage bonds run off as planned, following a strategy initiated last year.

“This was a more dovish Fed, but not dovish enough for the markets,” said Kathy Bostjancic, head U.S. financial market economist at Oxford Economics. Bond markets have priced in less than one rate increase next year.

Treasury yields tumbled and buying soared “after it became apparent Mr. Powell was repeating things he could have said three to four weeks ago,” said Jim Vogel, a rate strategist at FTN Financial. Bond traders felt Mr. Powell’s comments were insufficient to address the rapid decline in traders’ economic confidence in recent weeks, he said.



The updated projections released Wednesday showed 11 of 17 officials expected they would need to raise rates no more than two times next year, compared with seven of 16 officials who held that view in September.

Six officials expected to raise rates three times or more in 2019, down from nine of them in September, and six believed the Fed might need to raise rates no more than once, up from three policy makers in September.

Officials penciled in one rate rise in 2020 and none in 2021, and their median projection of the neutral interest rate, which neither spurs nor slows growth, edged down to 2.75% from 3%. The latest increase leaves the Fed about one interest-rate move away from that neutral setting.

The changes signal the impending close of a three-year chapter of policy “normalization” in which officials lifted interest rates slowly after holding them near zero for seven years to nurse an economy battered by the 2008 financial crisis.

Now, they think they need to raise rates a bit more to prevent solid U.S. economic growth from fueling excessive inflation or asset bubbles, but they aren’t sure how much further to go or how quickly. Their decisions on how to manage this new phase of fine-tuning their policy will depend largely on near-term changes in the economy and financial markets.



Officials made just modest revisions to their economic projections, showing less inflation and slightly slower growth than they anticipated earlier this year. The shifts reflected the result of a recent market pullback that has made financial conditions for businesses and consumers tighter, which means the Fed doesn’t have to raise rates as fast to keep the economy on an even keel.

Large swathes of the corporate bond market are trading at a discount to face value, a dynamic not seen since the depths of the financial crisis 10 years ago


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Steep declines in corporate-bond prices present an opportunity to turn a profit while earning juicy interest rates, some fund managers say. Large swathes of the corporate bond market are trading at a discount to face value, a dynamic not seen since the depths of the financial crisis 10 years ago.

Rather than a sign of impending doom, however, some investors see a unique opportunity to buy bonds with significant headroom for capital appreciation. Rising interest rates and the Federal Reserve’s shrinking balance sheet have sent shudders through the bond market.

Companies are finding it harder to raise new debt, regulators have expressed concerns about risks to financial stability, and investors have been burned by steep declines in the price of bonds issued by firms such as General Electric Co. But declines in the face value of bonds has also created a pricing dynamic that can make bargain hunting especially attractive.

In October and the first half of November, around 70% of U.S. investment-grade corporate bonds traded at or below face value, according to analysis of market data by MarketAxess, an unusually large proportion outside of a recession. In a period of rising rates, fixed-rate bonds that were issued at lower yields tend to decline in value in relation to newly issued bonds, which sport higher coupons. Slowing economic growth, which could lead to skimpier corporate cash flows, also worries bond investors.

When bonds trade below face value, there is more upside in case the bonds are redeemed early by the issuer or sold on to another investor at a higher price.

Investors in general neglect bond prices and their potential to appreciate, says Fraser Lundie, co-head of credit at Hermès Investment Management. Sectors that are fertile for mergers and acquisitions—such as construction, telecoms and media—are particularly appealing when bonds are trading well below face value since they tend to contain put options that can be exercised at or above par in the event of a deal, he added.

That’s partly why Hermès recently bought bonds issued by home construction company Toll Brothers. Callable bonds are growing in appeal as interest rates rise and prices fall. These let the issuer buy back bonds before they mature. The further bonds trade beneath the price at which issuers are able to buy them back, usually just above par, the bigger the payoff if they do decide to repurchase. Moreover, investors whose bonds have been bought back may be able to put their money to work at higher yields elsewhere.

The share of the bond market that is callable boomed after the financial crisis. When interest rates were falling to record lows, callable bonds gave issuers the chance to refinance the bonds if borrowing costs continued to drop. According to Dealogic the share of newly issued investment-grade bonds that are callable shot up from 61% in 2008 to 91% in 2016. It has hovered near that level since.

Regardless of the pricing quirks, some fund managers simply think the bond selloff of the past few months has gone too far.

U.S. corporate debt, especially at the lower end of the investment-grade spectrum, from firms that run energy pipelines, and from financial firms, is a favorite of Jeremy Cave, managing director of global fixed income and liquidity at Goldman Sachs Asset Management . He thinks company balance sheets are generally strong, and that the American economy is unlikely to enter recession until 2020 at the earliest.

François Bourdon, global chief investment officer at Fiera Capital, a Canadian asset manager, has dipped into two companies with particularly discounted bonds: GE, which has been beset by problems at its power unit, and electricity provider PG&E Corp. , which faces liability for equipment that may have caused Northern California’s deadly Camp Fire. He doesn’t intend to hold the positions for long, but felt they were oversold.


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To be sure, investors may find obstacles even if they do find bonds that appear to be trading at bargain prices. At times it has been a struggle to find sellers as well as buyers of corporate bonds, said Mr. Cave of GSAM, adding that derivatives such as credit-default swaps are more liquid but don’t offer value compared with cash bonds.

President Donald Trump said on Tuesday it would be a mistake if the Federal Reserve raises interest rates when it meets next week


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President Donald Trump said on Tuesday it would be a mistake if the Federal Reserve raises interest rates when it meets next week, as it is expected to do, continuing his criticism of the U.S. central bank. “I think that would be foolish, but what can I say?” Trump told Reuters in an interview.

Trump said he needed the flexibility of lower interest rates to support the broader U.S. economy as he fights a growing trade battle against China, and potentially other countries. “You have to understand, we’re fighting some trade battles and we’re winning. But I need accommodation too,” he said.

Trump named Jerome Powell as Fed chairman, but has repeatedly railed against him since he took over as head of the U.S. central bank last February. Trump in August told Reuters that he was not “thrilled” with Powell’s raising interest rates.

Trump was more conciliatory in his comments about Powell on Tuesday, but still criticized the policies of the man he chose for the top Fed job.

“I think he’s a good man. I think he’s trying to do what he thinks is best. I disagree with him,” Trump said. “I think he’s being too aggressive, far too aggressive, actually far too aggressive.”


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When asked whether he was concerned there might be a recession when he was running for re-election in 2020, Trump noted that other factors in the world could affect the economy, including Britain’s plans to leave the European Union, known as Brexit, and the unrest in France.

“Well, you have problems in the world, like Brexit, like France – a big problem in France. It’s shocking to see what’s going on in Paris,” Trump said, referring to anti-government protests that have targeted his French counterpart, President Emmanuel Macron.


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Macron this week made major concessions to try and quell the protests that have rocked France, announcing wage increases for the poorest workers and a tax cut for most pensioners.

“Are we heading for a recession? Trump said. “In my opinion, we are doing really well. Our companies are doing really well. If the Fed is going to act reasonably and rationally, I think we’ll go – I think we are a rocket ship going up.”

Former Federal Reserve Chair Janet Yellen told a New York audience she fears there could be another financial crisis

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Former Federal Reserve Chair Janet Yellen told a New York audience she fears there could be another financial crisis because banking regulators have seen reductions in their authority to address panics and because of the current push to deregulate.

“I think things have improved, but then I think there are gigantic holes in the system,” Yellen said Monday night in a discussion moderated by New York Times columnist Paul Krugman at CUNY. “The tools that are available to deal with emerging problems are not great in the United States.”

Yellen cited leverage loans as an area of concern, something also mentioned by the current Fed leadership. She said regulators can only address such problems at individual banks not throughout the financial system.



The former fed chair, now a scholar at the Brookings Institution, said there remains an agenda of unfinished regulation. “I’m not sure we’re working on those things in the way we should, and then there remain holes, and then there’s regulatory pushback. So I do worry that we could have another financial crisis.”

In the wake of the financial crisis, some agency regulatory powers were vastly expanded, but others, for example, the ability of the Fed to lend to an individual company in a crisis, were curtailed. Current Fed officials have pushed back against criticism that their reforms are making the system riskier, saying they are making the system more efficient.

Speaking in London in June 2017, shortly after leaving office, Yellen had said she did not believe there would be another financial crisis in our lifetimes because of financial reforms. However, she did warn at the time about the deregulatory efforts just then underway.

Yellen did not comment about the current financial or economic situation except to say, “Interest rates are low. I believe they’re likely to remain lower than they’ve been in past decades.” She noted that in a typical recession, the Fed cuts rate by 5 percentage points while the “normal level” of short-term interest rate is usually around 3 percent. “That means there’s much less scope to cut short-term rates than there’s been historically in the United States,” Yellen said.



Discussing the history of the Fed’s response to the crisis, Yellen said the Fed “probably could have done more” quantitative easing but was held back in part by public criticism of the Fed’s bond-buying program. “At the margin, I think that was something that concerned people about pushing asset purchases a lot further.”

J.P. Morgan and Goldman Sachs economists expect four rate hikes next year


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Trade relations between China and the U.S. overshadow most everything as stocks enter the month of December, but in the week ahead the Fed and U.S. economy come back into play with important Fed testimony and the November employment report.


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Fed Chairman Jerome Powell, who kicked off a powerful rally with his comments Wednesday , appears before the Joint Economic Committee of Congress this coming Wednesday to speak on the economy. Powell said the Fed was close to the neutral rate, the level on the benchmark fed funds rate that is neither stimulative nor slowing for the economy.

That comment sparked a rally of more than 600 points in the Dow and, in the market’s view, reversed a previous comment from Powell that neutral was far off, meaning the Fed would have to keep hiking interest rates aggressively. The market is now pricing in one hike for December and just one for all of 2019.

“I think the markets may have overemphasized the dovishness of what he’s trying to say,” said Scott Anderson, chief economist at Bank of the West. “I think [the Fed] is trying to wean the markets off of forward guidance. …They want to give themselves a little flexibility.” Anderson said there’s risk the first half of 2019 could be weaker, and he does expect the economy to slow just below 2 percent in the second half, in part due to trade wars.

He said Powell’s comment makes the Fed’s interest rate forecast all the more important when it is released after the next meeting on Dec. 19. The Fed currently has forecast three interest rate hikes for next year, but the market is concerned the economy will not support that many. Powell‘s comments before Congress in the week ahead are also important, given the fact he was criticized by President Donald Trump for raising interest rates.

“It’s kind of dicey politically, I think, and the fact his statement just a month ago was interpreted so hawkishly,” said Anderson. Economists expect Powell to state that the Fed is independent and point to the fact that it is dependent on data for rate guidance.

Although the stock market rallied on Powell’s statement and bond yields fell, some economists believe the markets misinterpreted the Fed’s message. Both J.P. Morgan and Goldman Sachs economists expect four rate hikes next year.

The emphasis in the week ahead will also be on any U.S. data that can help steer the Fed. Most important is Friday’s employment report, but there are also vehicle sales and ISM manufacturing data Monday.

Economists expect 200,000 jobs were created in November, and wages grew at a pace of 3.1 percent year over year. Vehicle sales will also be important, especially after GM’s announced layoffs, and economists are expecting to see sales on an annualized basis at 17.2 million, down from the 17.6 million reported in October.

OPEC meets Thursday, and analysts expect Saudi Arabia and Russia to steer the group to a production cut, with Saudi Arabia bearing most of it. Oil prices fell more than 20 percent in November, their worst month since October 2008.

“Our base scenario is you might get some sort of actual but gradual and not really telegraphed 1 million barrels a day cut,” said Citigroup energy analyst Eric Lee.

West Texas Intermediate crude futures lost 22 percent in November and closed down 1 percent Friday at $50.93 per barrel. Stocks staged a stunning turnaround in the past week, erasing losses for an otherwise rough month of November.

The S&P 500 was up 4.8 percent to 2,760 for the week and is now just a point below the key 200-day moving average. The S&P was up 1.8 percent for the month of November. Redler said the next area of resistance is around 2,810, if stocks continue to gain after the weekend meeting.


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Stock traders may also be watching the bond market , after the 10-year Treasury yield fell to 2.99, just below the 3 percent level. The yield, which moves opposite price, moved closer to the yield of the 2-year , in a flattening move. With the 2-year at 2.78, the difference was just 21 basis points.

Traders believe that occurs when the market is warning about the strength of the economy. If the yield inverts and the 10-year drops below the 2-year, it is a fairly reliable recession warning.

The Federal Reserve issued a cautionary note Wednesday about risks to financial stability


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The Federal Reserve issued a cautionary note Wednesday about risks to financial stability, saying trade tensions, geopolitical uncertainty and a buildup in corporate debt among firms with weak balance sheets pose potentially strong threats.

In what is often a boiler plate report on conditions in the banking system and corporate and business debt, the Fed instead warned of “generally elevated” asset prices that “appear high relative to their historical ranges.”

In addition, the central bank said ongoing trade tensions, which are running high between the U.S. and China, coupled with an uncertain geopolitical environment could combine with the high asset prices to provide a notable shock.

“An escalation in trade tensions, geopolitical uncertainty, or other adverse shocks could lead to a decline in investor appetite for risks in general,” the report said. “The resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels.”

The drop in asset prices would make it more difficult for companies to get funding, “putting pressure on a sector where leverage is already high,” the report said.



The report further noted that the Fed‘s own rate hikes could pose a threat. A market and economy used to low rates could face issues as the Fed continues to normalize policy through rate hikes and a reduction in its balance sheet, or portfolio of bonds it purchased to stimulate the economy.

“Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and international financial markets and strains in institutions,” the report said.

On the bright side, banks and other financial institutions are seen as well capitalized and thus in a good position to absorb shocks. Consumer debt also has kept pace with GDP increases, indicating little threat there. For businesses, though, there could be issues, particularly among those that have added to already high debt levels.

So-called leveraged loans have surged recently, as have companies whose bonds are rated near the bottom end of the investment-grade ladder and are thus susceptible to slipping into junk territory.

“High leverage has historically been linked to elevated financial distress and retrenchment by businesses in economic downturns,” the report said. “Given the valuation pressures associated with business debt … such an increase in financial distress, should it transpire, could trigger a broad adjustment in prices of business debt.”



The Fed noted that the share of investment-grade debt classified at the low end of the range has “reached near-record levels” of $2.25 trillion, or about 35 percent of the total corporate bonds.

The Federal Reserve has signaled that it plans to proceed with an interest-rate increase in December


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Market turbulence is leading some investors to call on the Federal Reserve to halt its campaign of interest rate increases, but the selloff in stocks and corporate bonds that accelerated Tuesday is unlikely to stop the central bank from raising rates when it meets again next month.

Fed officials have signaled in recent days they plan to proceed with another quarter percentage point increase in their benchmark short-term interest rate when they meet Dec. 19, marking their fourth rate increase this year. The market pullback does underscore however the uncertain outlook for what the Fed will do after that.

Fed officials are divided over how many times the central bank will raise rates next year. Projections released after the Fed’s meeting in September showed officials are roughly equally split over whether the economy will require two, three or four rate rises next year. Officials will update their projections when they meet in December. Some officials could reduce their estimates for the number of rate increases required next year if the market rout continues, or if their expectations for growth or inflation next year recede.


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The Dow Jones Industrial Average fell sharply Tuesday to its sixth drop in eight trading days, a move that has wiped out its gains for the year. The stock-market selloff of the past fewmonths has been accompanied by a rise in theyield demanded by bond investors.

For the Fed to change its December plan, the market selloff would likely need to signal some broader deterioration in the U.S. outlook. Recent economic data shows few signs of a slowdown outside of the rate-sensitive housing sector. A continued run of strong labor-market data, in particular, would make it difficult for the Fed to justify a pause.

“Interest rates are still very low. We’ve raised them, but they are still at a very low level,” said New York Fed President John Williams on Monday. He reiterated the Fed’s plans to pursue a “gradual path” of rate rises.



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Some investors worry that recent troubles in stocks and bonds could portend more economic weakness in the U.S. and abroad than Fed officials are counting on, and that a rate increase in that environment would be dangerous.

“I would pause and see if the market knows something we don’t,” said Stanley Druckenmiller, who once ran George Soros’s hedge fund and today manages his own money. He has been a vocal critic of the Fed’s reluctance to boost rates in recent years and other efforts to stimulate the economy. But he points to a number of signs of trouble in the market as reasons to hold off on a rate increase next month.

In recent weeks, Ray Dalio, founder of $160 billion hedge-fund firm Bridgewater Associates LP, has argued that the Fed’s interest-rate hikes will hurt asset prices, and that such share weakness will in turn undercut the economy. He’s also spoken of the risks of boosting rates, partly because the Fed is in an unusually weak position to aid the economy if a downturn results and such help becomes needed, partly because interest rates remain quite low.



 

Complicating matters for the Fed is the fact that President Donald Trump has been calling on the central bank to halt interest rate increases. Some investors might interpret a central bank decision to stop now as a bend to political pressure, which would hurt the Fed’s inflation-fighting credibility.

Banks have enjoyed a profit boost from rising interest rates over the past couple of years. But now those higher rates could turn into a drag.


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The yield on the benchmark 10-year Treasury note, which is tied to commonly used mortgage rates and many other borrowing costs, recently hit a fresh seven-year high. The Federal Reserve has lifted its key policy rate three times this year, with one more increase expected in 2018. For years, as the Fed kept interest rates near zero, banks blamed superlow rates for crimping their ability to make money. Now that rates are rising, banks are finding their effect is more nuanced.

At the start of a rate-raising cycle, banks can usually raise the rates they charge on loans before raising the rates they pay on deposits. But as the rate-hiking cycle moves into its later stages, some analysts and investors are concerned about the newfound pressure that may put on bank margins, undoing some of the profit boom that followed the central bank’s rate increases over the last three years.

“The benefits of rising rates will probably run their course later this year into next year,” said Gerard Cassidy, an analyst at RBC Capital Markets. “Over time, rising rates will work against the banks.”

The rate environment is an important topic as banks begin reporting results for the July-to-September period on Oct. 12. Bank stocks have been in a funk this year. The KBW Nasdaq Bank Index is roughly flat, far underperforming the 8% rise in the S&P 500. Goldman Sachs Group Inc. and Morgan Stanley are down more than 10% this year, while Citigroup Inc. has fallen 2.7% and Wells Fargo & Co. has dropped more than 12%.

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Banks, of course, are finding they can charge more for many products as rates rise. The average rate on a home-equity line has risen to 6.18% from 4.75% in December 2015, when the Fed began the rate-raising cycle, according to Bankrate.com, a personal finance website. The average rate on a credit card rose to 17.4% from 15.78%. The refinancing business, which buoyed banks in the years after the financial crisis, is perhaps most vulnerable to rising rates. Mortgage origination volume is expected to fall 6% this year, driven by a 24% drop in refis, according to the Mortgage Bankers Association.

Core Inflation Remained Near Fed’s Target in August. Data are likely to validate the central bank’s view that inflation pressures are under control


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The core personal-consumption-expenditures price index, which excludes food and energy products, was flat in August from July, the Commerce Department said Friday. The broader PCE index, including those volatile components, rose 0.1%, due to a surge in gas prices. On a 12-month basis, both price measures were at or near the Federal Reserve’s 2% inflation target. The core index rose 2% from August 2017, while the broader PCE index was up 2.2%.

Friday’s data are likely to validate the Fed’s view that inflation pressures are under control, even as the economy grows briskly and the unemployment rate hovers well below levels that most economists view as sustainable. Policy makers view the core PCE index as a reliable indicator of underlying price pressures and a good predictor of future inflation. “I don’t see it yet,” Fed Chairman Jerome Powell said Wednesday of a pickup in inflation.

“We’re seeing a sort of modest increase in wages, inflation right around 2%, no sense of it moving up really, so we’re not seeing it yet and, you know, we just aren’t. And we’re watching very carefully.” The Fed seeks 2% inflation because they see that as consistent with a healthy economy.

The last time core PCE inflation was lower on a monthly basis was in March 2017, when intense competition among cellphone service providers caused prices for wireless plans to plummet. By contrast, the slowdown last month was more broad-based, with prices for a variety of items—including household appliances, clothing and medical products—declining, while health care costs were flat.

Many economists say a stronger dollar is likely keeping a lid on the prices of goods, many of which are either purchased overseas or compete with imports. The WSJ Dollar Index, which measures the greenback against a basket of other currencies, has risen about 7% since mid-April. Investors say the appreciation has likely been fueled by rising interest rates and faster economic growth in the U.S. compared with other developed economies.

The Fed, seeking to keep the economy on an even keel, has raised its benchmark interest rate three times this year to a range between 2% and 2.25%. Most central-bank officials expect to raise rates again before year’s end and three more times next year and one in 2020. While many economists expect the Trump administration’s trade disputes to put upward pressure on prices in the months ahead, that hasn’t happened yet. Monthly core PCE readings moderated over the summer, averaging just 1.3% on an annualized basis from June through August, said Julia Coronado, president of Macropolicy Perspectives.

That suggests it may be too early for the Fed to declare success in its goal of bringing inflation sustainably back to 2% after years of falling short after the recession, Ms. Coronado said. “It looks like we’ve moved up to a slightly higher range, but it’s not clear that we can yet say that the Fed is symmetrically achieving its inflation target,” she said. “While wage growth has been moving higher, it’s still very moderate, and consumers are still very price sensitive.”

Bond markets signal early end to Fed rate rises. While the central bank hails strength of US economy, traders are not so sure.

StockMarketNews.Today – While the Fed expects to raise rates into next year and potentially the year after — a point that could be reiterated by chair Jay Powell when he gives testimony this week to Congress — current prices in US interest rate markets suggest that the central bank will stop its hiking cycle sooner.

According to the median prediction by policymakers, the Fed policy rate will rise to 3.375 per cent in 2020. In contrast, eurodollar futures suggest rates may plateau in 2019.

The differences come as investors are factoring in the risk of a slowdown in the economy despite strong corporate earnings growth and positive economic data.

“The markets are telling us that there is a pretty high risk of economic slowdown or recession at the end of 2019,” said Guy LeBas, chief fixed-income strategist at Janney Capital Management.

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The yield on futures expiring in December 2019 stood at 2.97 per cent on Friday, and on futures expiring in March 2020 it was an almost identical 2.975 per cent. The yield falls to 2.96 per cent for December 2020 eurodollar futures.

“The market is saying that the Fed is wrong,” said John Brady, managing director at RJ O’Brien.

This is only the fifth time since 1989 that there has been an inversion in the eurodollar futures yield curve, where longer-term rates are below shorter-dated rates. Each time it has been followed by the Fed pausing its policy tightening.

The Fed has been stressing the strength of the economy in its recent communications but trade concerns have amplified fears that companies may begin to slow capital expenditure, while some analysts say that the boost from tax reform will begin to erode in 2019 as year-over-year growth comparisons will be set at a higher bar.

A second market measure of interest rate expectations, fed funds futures, which are less heavily traded than eurodollar futures, is showing a similar plateau in 2019, although it is not inverted.

The pattern can also be seen in the difference between two and 10-year Treasury yields, with the 10-year struggling to sustain levels above 3 per cent. When shorter-dated yields rise above longer-dated yields it is seen by many investors as a sign of a coming recession. The spread on Friday between the two Treasury benchmarks stood at just 24 basis points, the lowest level since 2007.

A majority of Fed policymakers expect two more rate rises this year. With further moves early next year, that would put the Fed close to its median estimate of the neutral interest rate, at which monetary policy neither stimulates nor cools the economy. Policymakers are intensely debating whether to push beyond that level or call a halt there.

Complicating deliberations is the Fed’s balance sheet, which some officials think may be artificially flattening the yield curve and making it a less useful indicator than in previous economic cycles.

The size of the balance sheet is still holding down long-term rates, they suggest, but the programme to reduce its holdings, which began in October of last year, may be contributing to an upward drift in short-term rates as investors struggle to digest the increase in supply.

Investors face a new week trying to ascertain whether the recent bounce in risk appetite can hold. Attention will focus on Federal Reserve chair Jay Powell when he testifies this week.

StockMarketNews.TodayInvestors face a new week trying to ascertain whether the recent bounce in risk appetite can hold. Attention will focus on Federal Reserve chair Jay Powell when he testifies on monetary and economic policy before Congress, while UK politics and the debate over a Brexit deal hangs heavily over the pound.

Now as Wall Street’s latest quarterly earnings season cranks up, investors will assess whether guidance from S&P 500 companies can deliver a broader-based rally. Tech has continued to drive the broad market and such narrow leadership is a typical late-cycle pattern. And while large US banks such as JPMorgan and Citigroup beat estimates on Friday, the reaction from Wall Street was mixed.

That raises the question as to whether we do see a sustained rise beyond 2,800 on the S&P 500 — a level that has represented the broad market’s ceiling since February — that would target the late-January record peak of 2,872.

Such a run will drag the All-World index higher, but in the past two months the story for global equities has been one of investors eyeing Wall Street as a haven from trade war jitters. The S&P 500 has outperformed the FTSE All-World, excluding the US, by some 10 per cent since early May.

With European equities having rallied in the past two weeks and Asia-Pacific markets, excluding Japan, having just broken a four-week run of losses, global equities are enjoying a respite, but it remains to be seen whether this is nothing more than a shortlived bounce.

Helping set the tone this week will be the views on trade, the economy and inflation from Fed chair Jay Powell and how this plays out in terms of the US bond yields and the dollar when he speaks on Tuesday and Wednesday. The Fed’s semi-annual monetary policy report released on Friday painted an optimistic outlook for the economy and downplayed threats from trade protectionism.

The recovery in risk appetite in July has largely been led by those EM currencies that were certainly due a bounce — Argentina, Mexico and South Africa. Turkey’s lira remains in the basement for very good reasons, while the renminbi, Korean won and Thai baht’s underperformance in July suggests they are being marked out as front-line casualties from a trade war.

Havens such as the Japanese yen, swiss franc and gold have been falling as the dollar has rebounded. In turn, gold is back testing $1,240 an ounce and copper, for now, has stopped sliding after plumbing a 12-month low.

As investors look at the price action and gauge whether the current bounce has substance, one important consideration is that thin summer trading conditions can cut both ways, exacerbating selling and buying flows. Rather than fret over a classic summer swoon, investors could well be rewarded further as a bounce in risk appetite gathers pace. Michael Mackenzie

Will UK data outshine Brexit and lift the pound?
After a wave of political turbulence, sterling traders are in need of some respite — but they are unlikely to get it.

The pound seemed to have weathered last week’s Brexit white paper publication and cabinet resignations, raising hopes that a floor in the currency had been reached. Sterling volatility is surprisingly low, given the political heat being generated.

Then Donald Trump breezed into town to rubbish Theresa May’s Brexit plan and toss her dream of a US-UK free trade deal into the Chequers fireplace. Sterling promptly fell.

The pound is back down among the 2018 lows, hovering around the $1.31 mark, nearly 10 per cent off its April peak of $1.43. Brexit remains a tortuous affair for investors to read, this week bringing further attempts by backbenchers to pivot the debate their way and important votes on the trade bill.

But investors will also be watching how European leaders respond to Mrs May’s proposal. A hardening of its position will be negative for the pound and put the prime minister under pressure to offer further concessions. That will imperil her government.

It is more straightforward for investors to trade the pound on monetary policy, and most analysts are looking at market pricing that strongly expects a rate increase at the August meeting of the Bank of England. Better data of late have been supporting that case, and this week’s jobs and wages figures, inflation numbers and retail sales all have the potential to distract investors from Brexit uncertainty.

JPMorgan and Citi fail to impress investors despite strong earnings. Investors fret that the Fed’s rate rises will force them to pay more to depositors.

StockMarketNews.Today – The two banks both unveiled double-digit percentage rises in net income from a year ago, helped by corporate tax cuts and solid performances from investment-banking divisions. Their figures stood in contrast to Wells Fargo, whose revenues and profits declined as it grapples with a series of compliance problems.

Shareholders were underwhelmed by the figures, however, extending a sell-off in bank stocks that began after a historic rally propelled them to a post-crisis high in January.

Investors had anticipated that rising rates should be a boon for banks, allowing them to push up interest charges for borrowers, increase rates for depositors more slowly, and pocket the difference.

Yet the second-quarter earnings painted a muddier picture, as some parts of the businesses showed pressure from higher interest rates.

There are signs higher borrowing costs are hurting demand for some loans. Fees from mortgage banking at Wells fell a third from a year ago to $770m.

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Analysts also highlighted that Wells, JPMorgan and Citi were all paying more for their funds. JPMorgan’s interest expenses jumped 56 per cent from a year ago to $5.4bn as its interest-bearing deposit rates doubled to 0.5 per cent. Wells’ deposit expenses leapt 87 per cent to $1.27bn.

“They weren’t paying anything a few years ago — it’s extremely competitive now,” said Christopher Whalen, a bank analyst. “The cost of that money is going up a lot. Where you’re really seeing the pressure is market funding — bonds, interbank funding. All of that reflects higher rates.”

JPMorgan’s total net interest income nevertheless rose a tenth to $13.5bn, helped by yields on loans and higher lending volumes.

Jamie Dimon, chief executive, cautioned that global trade concerns could dent the confidence of corporate America in the months ahead. “There are unpredictable outcomes if you start skirmishes like this with multiple countries,” he said. “It’s a worry. Hopefully it gets resolved.”

Mr Dimon added, however, that so far “it’s kind of affecting psyche more than it is economics”.

While corporate and institutional depositors and wealthy customers with large savings pools are demanding higher rates, the largest US retail banks have largely managed to avoid passing on rate rises to regular consumers, a phenomenon known in the industry as a low deposit “betas”.

Michael Corbat, Citi’s chief executive, said consumers may soon “clamour” for higher rates on their deposits, as the gaps between rate rises from the Fed begins to narrow. “As you get to the point where [the Fed] increases rates in a much more rapid fashion, you’ll see those betas continue to increase,” he said.

John Shrewsberry, Wells chief financial officer, said: “You can pretty easily imagine that the Fed goes a couple more times this year.” He added that would probably increase calls from depositors “to say, ‘Hey, I’d like to get paid a little bit more’”.

JPMorgan’s forecast-beating results were supported by its capital markets and investment banking businesses. Fees from investment banking leapt 17 per cent to $2.2bn. Fixed income markets trading revenue climbed 12 per cent, excluding certain items, while equities trading revenue jumped 24 per cent.

Citi’s investment bank performance lagged behind its rival’s. Its fees from debt trading slipped 6 per cent from a year ago, to $3.1bn, while revenues from advising companies on mergers and capital raising were 7 per cent lower at $1.4bn.