April 26, 2018
United States:
Fed at Odds With Itself as It Eases Bank Rules and Raises Rates
Federal Reserve policy makers seem to be working at cross purposes. In laying out plans to ease some constraints imposed on banks after the financial crisis, the Fed is moving to free up tens of billions of dollars for financial institutions to lend to promote faster economic growth. At the same time it is reducing its balance sheet and gradually raising interest rates to restrain credit creation and keep the economy in check. “The timing is not the most opportune” for relaxing the banking rules, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. Those steps will complicate the Fed’s effort to engineer the soft landing of an economy that is already being juiced by tax cuts and government spending increases. To help bring that about, officials plan to keep raising interest rates over the next few years, though they’re expected to hold policy steady at their meeting next week. “By itself this would risk putting regulatory policy on the same pro-cyclical trajectory as fiscal policy,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, though he added that the economic impetus from the former is dwarfed by that from the latter. In unveiling a proposal on April 11 to ease leverage limits on Wall Street banks, the Fed and the Office of the Comptroller of the Currency said the step might lower the amount of capital lenders are required to hold in their main subsidiaries by $121 billion. The move would give banks added flexibility to extend credit.
The Next 9 Days Will Teach Us a Lot About the U.S. Economy
The Federal Reserve has spent the past decade coaxing a recession-torn U.S. economy back to health. They’ve had resounding success in slashing unemployment, yet wage growth and inflation have remained stubbornly slow – keeping victory at bay. The week ahead could finally clinch it. Data released over the next nine days could show both accelerating prices and pay, like pieces of a data puzzle clicking into place. Other major economic headlines will bring key news for the central bank, from a Treasury refunding to bellwether earnings reports. Here’s what to watch as the Fed closes in on a milestone that will make it a rarity in the post-crisis world: a monetary authority that has hit all of its targets on the nose. Gross domestic product data for the first quarter will be the main event on Friday, but a side act – the Employment Cost Index – could easily steal the show. The figures will be released alongside GDP at 8:30 a.m. Financial markets are sensitive to any signs of stronger inflationary pressures, and they interpreted a jump in average hourly earnings back in February as a sign that the central bank might pick up the pace. If this quarterly series on labor costs comes in stronger than expected, it could have a similar effect. Any pickup would be welcome news at the Fed, though: Officials have been puzzled that slow pay gains have persisted despite low unemployment. For what it’s worth, GDP is likely to show a slowdown to 2 percent for the first quarter from 2.9 percent at the end of 2017. That fits a pattern of early-in-the-year slowdowns, and economists expect a second-quarter rebound.
Europe:
ECB Keeps Policy Unchanged as Slower Growth Favors Caution
The European Central Bank maintained its pledge to move slowly in removing euro-area stimulus, setting the stage for President Mario Draghi to face questions over a recent spate of weaker-than-expected economic data. Policy makers reiterated that they’ll continue buying 30 billion euros ($36 billion) of assets a month until at least the end of September, while linking the conclusion of quantitative easing to a sustained adjustment in inflation. They kept interest rates unchanged and repeated that they expect borrowing costs to stay at present levels until well past the end of net bond purchases. The Frankfurt-based institution also repeated that additional support will come from its policy of reinvesting maturing debt. Attention now turns to Draghi’s press conference at 2:30 p.m. in Frankfurt. The euro held steady after the decision, trading up 0.1 percent at $1.2178 at 1:47 p.m. Frankfurt time. The unchanged decision comes a few days after Draghi acknowledged at the International Monetary Fund meetings in Washington that while the euro area’s growth may have come off the boil, the economic expansion will continue. The key question facing the ECB president is whether the subdued momentum warrants further caution as policy makers prepare to potentially phase out bond buying later this year. Growth concerns come on top of risks emanating from global trade restrictions and a stronger euro, which threaten to undermine the region’s export-heavy economy. Inflation, meanwhile, remains well below the central bank’s goal, and was unexpectedly revised to 1.3 percent in March from an initial estimate of 1.4 percent. Several policy makers have expressed confidence nonetheless, with Executive Board member Yves Mersch arguing that the dip in price pressures has been less pronounced than expected.
Asia
Asia’s Top Stock Market of 2018 Set to Be World’s Worst in April
Asia’s top stock market this year is about to become the world’s worst performer this month. Vietnam’s Ho Chi Minh Stock Index slid 3.2 percent at the close Thursday as trading resumed after a holiday on Wednesday, with foreign investors unwinding their positions in emerging markets and rushing to exit a market that reached a record about two weeks ago. Thursday’s fall brought the drop so far in April to 11 percent, on course for its worst monthly performance in seven years. The decline wiped out more than $15 billion from the nation’s market capitalization. “There is a lot of foreign selling today and clearly the market is on a down trend and it is really pushing some margin calls,” Michel Tosto, Ho Chi Minh City-based head of institutional sales and brokerage at Viet Capital Securities, said by phone. The benchmark VN Index climbed a 22 percent this year to a record on April 9, extending a 48 percent rally in 2017. The country attracted the second-highest amount of foreign inflows in Southeast Asia this year, attracted by the rally and a privatization program by the government has also led to a flurry of companies tapping the capital markets. As investors fled the market, the gauge entered a technical correction at the start of the week with a drop of more than 10 percent from the peak, before extending the slide on Thursday. Techcombank, a Vietnamese lender backed by Warburg Pincus, is seeking to raise about 21 trillion dong ($922 million). This would be Vietnam’s biggest initial equity offering, surpassing mall operator Vincom Retail JSC’s sale in October, data compiled by Bloomberg show. Luxury property developer Vinhomes JSC, which recently started gauging demand for its offering, could raise as much as $2 billion, exceeding Techcombank, Bloomberg News reported. The fundraising efforts may have added to the market slump, according to Fiachra Mac Cana, managing director at Ho Chi Minh Securities Corp.