“The Federal Reserve Cuts Interest Rates…”

The Federal Reserve Cuts Interest Rates

In a statement at the end of a two-day policy meeting, the Federal Reserve cut interest rates by twenty-five basis points on Wednesday to 2 percent – 2.25 percent.  Fed Chairman Jerome Powell said the move might not be the start of a lengthy campaign to shore up the economy against risks including global weakness.  Amongst the signs he cited of a global slowdown, are simmering US trade tensions and a desire to boost the too-low inflation.  “Let me be clear, it’s not the beginning of a long series of rate cuts,” Powell said in a news conference after the Fed released its policy statement.  He also said, “I didn’t say it’s just one rate cut.”  Boston Fed President and Kansas Fed President have raised doubts about a rate cut in the face of the current expansion and an unemployment rate that is near a 50-year low and the robust household spending.  In its statement the Fed said it continued to regard the labour market as “strong” and added that household spending had “picked up”.  It also noted that business spending was “soft” and that measures of inflation compensation remain low.  The Fed said that the rate cut should return inflation to its 2 percent target but uncertainties about the outlook remain.  Sustained expansion of economic activity and a strong labour market are the most likely outcomes said the FED.  The FED will also be ending quantitative tightening.  It will stop shrinking its $3.6 trillion in bond holdings starting 1st August, two months ahead of schedule.  The FED bought most of the bonds after the 2008 global financial crisis to stimulate a sluggish economy but in more recent months has been letting some of them expire without replacing them.

Bank Of England Meeting

The Bank of England (BOE) cut its growth forecasts on Thursday amid increased Brexit worries and a slowing global economy.  It gave no indication if it was considering following other central banks to lower interest rates.  A day after the FED reduced rates, the BOE said it still expected to raise borrowing costs gradually, however, this depended on a “smooth” Brexit and a global pick-up.  Bank of England Mark Carney said after the announcement, “Profound uncertainties over the future of the global trading system and the form that Brexit will take are weighing on UK economic performance”.  The BOE Monetary Policy Committee (MPC) voted 9-0 to keep rates unchanged at 0.75 percent and said that even after a no-deal Brexit it would not automatically cut rates.  With the new Prime Minister Boris Johnson committed to taking Britain out of the EU on 31 October regardless of whether he can secure a transition deal, markets are seeing a disorderly Brexit.  The BOE said this has led to a “marked depreciation of the sterling exchange rate” which is near a three-year low against a basket of other major currencies.

Trade Talks US and China

On Wednesday Top US and Chinese trade officials met in Shanghai for talks with the aim to end the trade war.  This week’s meeting came about after the G20 truce and after an official survey showed China’s factory activity shrunk for the third month in a row in July.  This indicates the strains China is facing by the trade war.  The trade talks ended without much progress to find a solution to the long-standing trade war.  Meanwhile, downbeat data and factory surveys on Thursday indicated further weakness for Asia’s trade-reliant economies.  Whilst pressure on Chinese factories eased slightly, manufacturing activity continued to shrink.  From his end, US President Donald Trump vowed to impose a 10 percent tariff on $300 billion of Chinese imports from 1st September.  This announcement on Thursday extends Trump’s trade tariffs to nearly all of the Chinese goods the United States imports and marks an abrupt end to a temporary truce in the trade war that had an impact of global growth.  Furthermore, Trump also threatened to raise tariffs further if the Chinese President fails to move more quickly to strike a trade deal.  According to Moody’s the new tariffs would weigh on the global economy at a time when growth is already slowing in the United States, China and the EU.

Germany’s Unemployment

German unemployment increased less then expected in July according to data released on Wednesday, suggesting that the labour market in Germany, which is the largest economy in Europe so far remains relatively immune to an economic downturn which is driven by a manufacturing crisis.  Data from the Federal Labour Office showed the number of people out of work increased by 1,000 to 2.283 million in seasonally adjusted terms.  The jobless rate held steady at 5 percent slightly above the record-low of 4.9 percent reached earlier this year.

UK Prime Minister Johnson Heads To Northern Ireland

Britain’s new Prime Minister Boris Johnson headed to Northern Ireland on Wednesday on a nationwide tour to sell his plan to pull Britain out of the EU with or without a deal.  Plans about the border has become the most contentious issue in Britain’s negotiations with the EU over the terms of its exit.  The bloc insists on a “backstop”, an insurance policy to prevent border controls by requiring Britain to obey some EU rules in case both sides fail to agree a later trade deal.    From his end Johnson rejects that demand on the basis of “undemocratic” and says Britain will leave the EU with no deal at all unless the EU drops it.  He says technology can ensure a friction-free border even if Britain adopts separate customs and regulatory rules.  Northern Ireland voted to stay in the EU in 2006 when the rest of Britain voted to leave.

Canada’s GDP Growth

Canada’s economy grew by 0.2 percent in May thanks to a rebound in manufacturing, according to data from the Statistics Canada.  The data supported investor expectations that the Bank of Canada will leave the benchmark interest rate unchanged at 1.75 percent this year, after the central bank made it clear earlier this month that it had no intention of easing monetary policy.  This is a different approach from that other major central banks.

Bank Of Japan

The Bank of Japan (BOJ) kept from expanding stimulus on Tuesday, however it committed to do so if a global slowdown will jeopardise the country’s economic recovery.  In a news conference, BOJ Governor Haruhiko Kuroda said, “I don’t think Japan has lost momentum to hit the BOJ’s price goal, or that there is an imminent risk of this happening”.  As was widely expected the BOJ maintained its short-term interest rate target at -0.1 percent and a pledge to guide 10-year government bond yields around 0 percent.  It also kept intact its forward guidance on future monetary policy, committing to keep rates at current ultra-low levels at least through spring 2020.  The bank added that it will ramp up stimulus without hesitation “if there is a greater chance the momentum for hitting its price target is lost.”  The US-China trade war hurt Japanese exports and business sentiment.  In a quarterly report on the outlook, the BOJ cut its inflation forecasts and wared that risks to the economy were skewed to the downside due to increasing overseas uncertainty.  Kuroda said heightened overseas risks will likely be the biggest trigger for additional easing.  Kuroda also said that BOJ could cut interest rates, ramp up asset buying, speed up money printing or combine the steps.  Meanwhile, easing by other central banks could also trigger a spike of the yen that could hurt Japan’s export-reliant economy.

Oil

Oil prices increased for a fourth day on Tuesday over optimism that the US FED would have cut interest rates for the first time in more than 10 years, hence supporting fuel demand growth in the US which is the world’s biggest oil producer.   Thursday saw the price of oil skidding for the first time in six days, after the US Federal announcement dampened any hopes for a string of interest rate cuts and there was no progress in the China-US trade talks to resolve the trade dispute.  The price drop came despite a bigger-than-expected decline in inventories in the US, a drop in crude oil production amongst OPEC members and Libya cutting exports.  On Thursday after President Trump said he would impose additional tariffs on Chinese imports starting 1st September oil prices plummeted more than 7 percent, with the US benchmark posting its worst day in more than four years.

Gold

Gold prices dropped to two-week lows on Thursday after the US Federal Reserve cut rates by 25 basis points as it was expected, however, the FED’s move tampered market expectations of a lengthy easing cycle.   Spot gold was down 0.4 percent at $1,407.40 per ounce after falling to its lowest since 17 July at $1,404.71.  With Powell’s comments, the dollar rose 0.3 percent making gold expensive for holder of other currencies.

Markets Wrap

European shares opened lower on Monday as weak earnings from Heineken and a wait for an expected US interest rate cut, offset a surge in London Stock Exchange Group (an increase of 11 percent) on its potential deal to buy financial data firm Refinitiv.  London’s FTSE was the only major gainer in Europe, amid the LSE news and other deal talks as well as weakness in the British pound on worries over a no-deal Brexit.  Tuesday saw European shares slipping as grim forecasts from German giants Bayer and Lufthansa soured sentiment.  Meanwhile, the battered pound helped London’s blue-chip index outperform a second day.  Europe’s travel and leisure index  .SXTP was the biggest faller among major sectors, with a 1.1 percent drop that would be its worst in more than a month.  London’s blue chip FTSE was the biggest outperformer of the main indexes touching 11 month high on the back of a 3 percent jump in shares for energy giant BP.  The index which is heavy with international-focused firms who get their revenue from abroad, was also supported by a drop in the sterling to more than two years lows as the possibility of a disorderly Brexit rises.  French stocks dropped 0.2 percent, as they were hit by data showing the economy slowed slightly in the second quarter.  Lenders were also biggest decliners in Europe with bank-heavy indexes in Italy .FTMIB and Spain .IBEX both declined more than 0.6 percent.  On Wednesday US stocks opened higher, lifted by Apple’s shares whose upbeat earnings eased concerns over the impact of the US-China Trade war.  Investors also awaited an almost certain cut in interest rates by the Federal Reserve.  Asian shares slipped to six-weeks lows on Thursday on the decision taken by the FED to raise rates. During Jerome Powell’s statement, US stock prices fell, with the benchmark S&P 500 index .SPX closing 1.1 percent lower. European shares also tracked Wall Street and the Asian markets into the red.   Meanwhile, US Treasury yields rose after the announcement and were seen three basis points higher at 2.051 percent.  In Europe, core eurozone bond yields inched up from all-time lows on Thursday after the FED announcement.  On Thursday US Treasury yields were little changed as first-time filings for domestic unemployment benefits rose last week but were within the forecasts by economists, supporting a view of a sturdy domestic labour market.

Currency Roundup

Monday saw the sterling taking a turn to the worse after Boris Johnson said the Brexit divorce was dead and warned that unless the EU renegotiated, Britain would leave on 31st October without a deal.  Sterling fell to a new two-year low versus the dollar on Tuesday amid speculation that Britain is heading for a messy no-deal Brexit.  The currency has dropped on worries that Britain will exit the EU without the agreements on trade and other key issues.  Furthermore, there is a chance that new Prime Minister Johnson will call an early election.  Meanwhile, the dollar traded near a two-month high against a basket of major currencies.  The yen was little changed versus the dollar on Tuesday, trading near a three-week low after the Bank of Japan left monetary policy on hold as expected.  On Thursday the dollar jumped to two-year highs as the US Federal Reserve rattled markets when it signalled that its first rate cut in more than a decade is not the beginning of a lengthy easing cycle.  The dollar index against a basket of six major currencies ended 2.5 percent higher in July and was last up 0.4 percent at 98.899.  The Australian dollar moved to as low as $0.6828, a level not seen since early January at $0.6715.    The China’s yuan weakened to a 1 ½ month low against the dollar, reflecting a bounce in the greenback after signals from the FED that its benchmark rat cut is not the start of an easing cycle.  China’s central bank kept its mainly policy rates on hold.  The Japanese yen surged to a five-week high versus the dollar and a 2 ½ year peak against the pound on Friday after the US President broke the truce in the China-US trade war bolstering the demand for safe-havens.  Meanwhile, the Chinese yuan slumped to its lowest since November 2018.

Malta:  Government Expenditure On Social Security Benefits January – June 2019

By the end of June 2019, a EUR 15 million increase in Social Security Benefits outlay was reported when compared to 2018.  Social Security benefits amounted to EUR 512 million during the first six months of 2019, which is 3 percent higher than 2018.

Malta:  Unemployment Rate – June 2019

The monthly unemployment rates are based on a harmonised source, the Labour Force Survey (LFS) in combination with Jobsplus as the administrative source.  In June 2019, the seasonally adjusted monthly unemployment rate was 3.4 percent.  For the month under review, the seasonally adjusted unemployment rate for males was 3.2 percent with the unemployed males as the major contributor to the overall unemployment.  Meanwhile, during the month under review, the seasonally adjusted unemployment rate for persons aged 15 to 24 years was 9.3 percent while the rate for the 25 to 74 age group stood at 2.6 percent.

 

 

 

Antonella Mercieca

Client Relationship Manager

Source:

Reuters, Bloomberg, https://nso.gov.mt

Date:

August 2nd, 2019


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