Quantitative easing

World markets rise as investors welcome boost from cheaper credit in China and prospects for further delay to Federal Reserve rate hike in US. The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%…

 

Powered by Guardian.co.ukThis article titled “China interest rate cut fuels fears over ailing economy” was written by Phillip Inman Economics correspondent, for The Guardian on Friday 23rd October 2015 13.24 UTC

China fuelled fears that its ailing economy is about to slow further after Beijing cut its main interest rate by 0.25 percentage points.

The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%. The one-year deposit rate will fall to 1.5% from 1.75%.

The move follows official data earlier this week showing that economic growth in the latest quarter fell to a six-year low of 6.9%. A decline in exports was one of the biggest factors, blamed partly by analysts on the high value of China’s currency, the yuan.

The rate cut sent European stock markets higher as investors welcomed the boost from cheaper credit in China, together with the hint of further monetary easing by the European Central Bank president, Mario Draghi, on Thursday.

Investors were also buoyed by the likelihood that the US Federal Reserve would be forced to signal another delay to the first US rate rise since the financial crash of 2008-2009 until later next year.

The FTSE 100 was up just over 90 points, or 1.4%, at 6466, while the German Dax and French CAC were up almost 3%.

The People’s Bank of China’s last rate cut in August triggered turmoil in world markets after Beijing combined the decision with a 2% reduction in the yuan’s value. Shocked at the prospect of a slide in the Chinese currency, investors panicked and sent markets plunging.

Some economists have warned that the world economy is about to experience a third leg of post-crash instability after the initial banking collapse and eurozone crisis. The slowdown in China, as it reduces debts and a dependence for growth on investment in heavy industry and property, will be the third leg.

World trade has already contracted this year with analysts forecasting weaker trade next year. The International Monetary Fund (IMF) in July trimmed its forecast for global economic growth for this year to 3.1% from 3.3% previously, mainly as a result of China’s slowing growth. The Washington-based fund also warned that the weak recovery in the west risks turning into near stagnation.

At its October annual meeting, it said growth in the advanced countries of the west is forecast to pick up slightly, from 1.8% in 2014 to 2% in 2015 while growth in the rest of the world is expected to fall from 4.6% to 4%.

Sanjiv Shah, chief investment Officer of Sun Global Investments, said: “The Chinese decision indicates that the authorities are clearly worried about the slowdown in the pace of economic growth and have decide to engage in more pre-emptive action. The [People’s Bank of China] has cut benchmark rates and reduced banks’ reserve requirements as well as scrapping deposit controls.”

But Mark Williams, chief Asia economist at Capital Economics, remained upbeat about the prospects for China’s sustained growth, arguing that the cut in interest rates was part of a longer-term strategy and not a reaction to deteriorating growth.

“The key point is that we shouldn’t take today’s announcement as evidence that policymakers have grown more concerned about the economy. Instead, this is a controlled easing cycle that underlines how China’s policymakers, unlike many of their peers elsewhere, still have room for policy manoeuvre,” he said.

“Admittedly, we’re still waiting for clear evidence of an economic turnaround – September’s activity data still don’t show any great improvement. Nonetheless, with more stimulus in the pipeline, we still believe the economy will look stronger soon.”

Corporations considered bellwethers of the global economy have also warned of a sharp slowdown. Caterpillar, the industrial equipment manufacturer, has seen profits slide over the last year. AP Moller-Maersk, the shipping firm cut its 2015 profit forecast by 15% on Friday, blaming a slowdown in the container shipping market.

The Danish conglomerate operates Maersk Line, the world’s largest container shipping company which transports roughly 20% of all goods on the busiest routes between Asia and Europe.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.


USA 

The developed nations have lately got away with throwing vast amounts of Quantitative Easing money into the system only because the results have not yet come home to roost;  but once more other people are paying the price…

Powered by Guardian.co.ukThis article titled “Quantitative easing and common sense” was written by Letters, for The Guardian on Wednesday 7th October 2015 18.34 UTC

Zoe Williams (It’s fine to print money, so long as it’s not for the people, 5 October) raises an important question about quantitative easing (QE). In the wake of the global financial crisis, it was adopted by the Bank of England. Capital markets had ceased to function. The banking system was in deep crisis. In the US and Britain, governments were driven to inject equity into the collapsing banking system. These huge outlays had to be funded by the issuance of public debt. The Bank made clear to the prime brokers (mainly the major commercial banks) that they would be offered access to zero-cost funds in order to bid in Treasury auctions. These funds were provided electronically by the Bank into the accounts of those banks held with it.

These no-cost credits enabled the prime brokers to purchase the government debt, and by agreement swap back the debt to the Bank at a modest profit. Once this happened, the electronic advances made by the Bank were cancelled. The net effect was threefold. First, the government’s solvency was preserved. Second, the prime brokers were able to secure profit from guaranteed transactions to replace more traditional forms of lending. Third – the odd bit – the Bank ultimately ended up holding the debt of the British government, not the private sector of the economy.

This reveals the “efficient secret” of central banking. The Bank is effectively financing the state through the indirect purchase of government debt. Zoe Williams asks the question: why can’t this “mechanism” be used to finance other major projects? The answer is that it could. QE involves little or no monetary expansion. It has no inflationary consequences. But these matters are not widely understood. Time for a reasoned debate on the merits of its wider use in these most unusual times.
Richard Tudway
Centre for International Economics

• Zoe Williams says “all money is created from nowhere”. She is talking through her hat. The basis of money, which is gold or, in some cases, other commodities (mainly metals) is as founded in the real world as any other product. To find, mine, refine and distribute gold requires vast amounts of human labour, which is why it is valuable – all value coming from the labour embedded in something.

Paper money and credit is simply a claim on real money, a paper or electronic token which saves carrying around bags of gold and it runs back to real money eventually. Issuing more tokens than there is gold is a large part of credit and banking, relying on everyone not turning up at the same time to claim it. It has a place and helps the world economy spin round, but detach it too far from real value (print too much) and it starts to create problems – like raging inflation, bank defaults etc.

When Richard Nixon took the dollar off the gold standard, the US was effectively bankrupt, surviving only by devaluing its debts and reneging on the agreed price for its imports. It has continued doing so ever since. Someone pays the price, and that is the developing world mainly. And eventually it collapses anyway, like it did in 2008.

The capitalist world has lately got away with throwing vast amounts of QE into the system only because the results have not yet come home to roost; but once more other people are paying, such as the Greek workers, the Middle East and, above all, China soaking up the paper money.

It cannot go on much longer. Even the Guardian routinely points out the imminence of further crisis. So, no, more of the same, however it is directed, solves nothing.
Don Hoskins
Economic and Philosophic Science Review

• How refreshing to read some common sense on macroeconomic policy. As long ago as 1948, Dudley Dillard (The Economics of John Maynard Keynes) was saying similar things: “Is there any necessity for subsidising the commercial banks by paying them huge amounts of interest to create the new money which is required for economic expansion? Is not the creation of new money properly a government function?” He clearly advocates “people’s QE”, though it is not called that. To the extent that there are underemployed resources and supply is responsive, it should not be inflationary.
John Levi
(Retired economics lecturer), Abingdon, Oxfordshire

• Zoe Williams’ article about printing money which does not grow on trees reminds me of an incident that took place in my university days. On a family visit to Cambridge, I had seen some rather expensive books which would help my studies. Over a cup of tea, I asked my father (a fruit grower, who specialised in apples) if he would kindly buy them for me. He replied that he had no money. “You must have,” I said. “You have just sold a whole cold store of apples.” He indignantly exclaimed: “Apples don’t grow on trees, you know.” I got my books.
Gillian Caddick
Peterborough, Cambridgeshire

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

European stock markets jump 1% after Fed Chairman Ben Bernanke announces stimulus program will be slowed, and Nikkei hits a six-year high. Why tapering hasn’t caused alarm? Banking union breakthroughs- analysis from Brussels…

 


Powered by Guardian.co.ukThis article titled “European and Asian markets rally after Fed’s dovish taper — business live” was written by Graeme Wearden, for theguardian.com on Thursday 19th December 2013 15.37 UTC

Time for some afternoon fun, or head-scratching: our Bumper Christmas quiz.

It’s packed with witty, taxing brain-teasers from the news in the last 12 months.

Updated

Afternoon summary

Time for a catch-up. European markets have risen sharply today as the Federal Reserve’s historic move to start winding back on its huge stimulus programme was greeted calmly by investors around the globe.

With Japan’s Nikkei hitting a six-year high overnight, the initial reaction to the winding back of America’s quantitative easing programme is positive — particularly as the Fed was more upbeat about the US recovery.

Expectations that EU member states will sign off on a new banking union deal at a two-day summit in Brussels starting today has also reassured European traders.

By cutting its bond programme by just $10bn (starting in January), and reiterating that interest rates won’t rise, the Fed maintained a dovish stance despite finally deciding to slow the pace of money printing.

If the US economy avoids a shock, the Fed might not cut its bond-buying programme to zero until next October, or even 12 months time. Should new problems arise, it could slow or stop tapering.

The benchmark indices are all up over 1% in afternoon trading, while the bond and currency markets remain calm.

Mike van Dulken of Accendo Markets coined it:

The bearded one has delivered his pre-Christmas rally! However, it wasn’t the bringer of children’s toys but the US Fed chairman with his economic optimism-driven taper of QE3.

The FTSE 100 is up around 60 points at 6557. Premier Asset Management fund manager Chris White reckons it will now end the year strongly:

I think the momentum is likely to continue into the year-end. The FTSE should end 50-100 points higher from here.

The Fed’s decision to reinforce its pledge not to raise interest rates before the recovery is entrenched also cheered the City — and reminded us that the Bank of England might need to tweak its own forward guidance.

Ashraf Laidi, chief global strategist at City Index in London, explains:

The Federal Reserve has successfully integrated the price stability component of its dual forward guidance into traders’ psyche by further delinking tapering of asset purchases from tightening conditions in the bond market.

The US dollar has strengthened through the day, helping to drive down the gold price. The pound has dropped to $1.635, a fall of 0.2%.

…..

Elsewhere, our Europe editor Ian Traynor has warned that EU leaders face a tricky Summit in Brussels, given Germany’s ongoing demands for tighter controls on weaker members of the eurozone.

There are also austerity protests in Brussels, with farmers blocking roads and erecting fires.

The Chinese central bank has launched an emergency liquidity programme to avert fears of a cash crunch.

Greece’s jobless rate has dropped slightly….

…and Ireland’s economy has posted rollicking growth in the last quarter.

Updated

Hats off to Alex Barker of the Financial Times for this graph explaining why Europe’s new rules for closing a failing bank might be a little, er, convoluted.

Calm start on Wall Street

Over on Wall Street, the opening bell has just been rung and trading is under way….

…and there’s a ‘Now what?” feeling on the trading floors. The main indices have all dropped slightly, with the Dow Jones index shedding 0.1%.

Not a surprise, really, as the Dow and S&P 500 both surged to record highs last night as Wall Street gave a thumbs-up to the Fed. The surprise rise in weekly jobless benefit claims is also weighing on shares…

Hmmm, this wasn’t in the plan. The weekly US jobs data this lunchtime showed that the number of Americans filing new claims for unemployment benefit has hit a near-nine month high.

The number of initial claims rose by 10,000 last week to 379,000. Now, this weekly data is volatile (affected by seasonal factors and the weather) but it’s not exactly a peachy sign – especially as claims also rose last week.

Economists had expected the weekly total to fall by around 35,000 to 334,000.

Updated

Economics editor Larry Elliott reckons that Ben Bernanke had one eye on the history books when he announced that the Fed would taper its bond buying next month, at his final press conference as chair.

The outgoing chairman of the Fed, an expert on the economic policy blunders of the 1930s, has pursued an ultra-stimulative approach in his determination to avoid a second Great Depression. But he does not want to be blamed, as Alan Greenspan was, for creating bubbles by leaving too much stimulus in place for too long. He can now say that he initiated the winding down of QE before handing the reins over to Janet Yellen.

Does the Fed’s decision have ramifications for other central banks? Not really, because all the major economies are at different stages of the economic cycle and have their own particular challenges to address. The one common factor is that central banks are winging it. Zero interest rates and QE were the response to a sluggish recovery, a broken financial system, heavily indebted consumers and the threat of deflation. But having created a world of stimulus junkies, central bankers are faced with the tricky decision of how to reduce the dosage. The answer from the Fed is plain: slowly and with great caution.

More here: Federal Reserve starts taper – and avoids Wall Street bloodbath

Updated

Photos: EU Summit

Over in Brussels, EU leaders arriving for their final summit of 2013 will be greeted by a large banner reminding them that Latvia joins the eurozone fold in two week….

Meanwhile, those anti-austerity demonstrators have been getting the attention. Two protesters wearing Angela Merkel and Jose Manuel Barroso masks have been displaying a banner wishing the leaders a “Merry crisis and a happy new war”.

As explained earlier, the summit is meant to finalise new banking rules to prevent a new crisis….

The Bank of England (BoE) may be watching today’s market reaction with particular interest.

The Federal Reserve has managed to ‘sugarcoat’ the tapering by hardening its forward guidance on interest rates – saying they could remain untouched “well past the time” that the US jobless rate hits its 6.5% threshold, especially if inflation remains low.

In the UK, the jobless rate (7.4%) is likely to hit the BoE’s 7% threshold much earlier than its original estimate of 2016. Governor Mark Carney regularly states that the 7% is not a trigger — might the BoE eventually toughen up his own language?

Jane Foley, top currency strategist at Rabobank, reckons it might. She says:

Just as the Fed has altered its forward guidance this week, there is speculation that the BoE may have to follow suit….

We currently anticipate the first BoE rate hike in May 2015. Give the buoyancy of most UK data releases, the market will start to bring forward its expectations for a hike unless the Bank acts to contain speculation.

Updated

All quiet in the emerging markets…..

Updated

Intriguing moves in China today, where the central bank conducted an emergency short-term injections of funding into the country’s financial system.

The People’s Bank of China also gave banks more time to apply for funds, in a bid to calm fears that cash could run short in the run-up to Christmas.

Those concerns had been fuelled by PBOC itself, which has been withholding new liquidity in recent days in a bid to tighten credit. That drove up the rates at which banks were prepared to lend to each other.

My colleague Heather Stewart has been looking into it, and reports:

Echoing similar measures it took in June, the People’s Bank of China took the unusual step of announcing, via Weibo, the Chinese equivalent of Twitter, that it had carried out a short-term liquidity operation, or SLO. Trading was also extended by an extra half an hour, to allow banks to benefit from the measure.

No details were published about the scale of the SLO, or which banks had been involved; but the liquidity injection evoked memories of the crisis measures taken by central banks in Europe and the US in the wake of the collapse of Lehman Brothers, as markets threatened to dry up.

Mark Williams, of consultancy Capital Economics, said: “The story of the past few months has been that the PBoC wants to tighten monetary conditions to slow credit growth, and that’s been happening in fits and starts.”

 More here: China’s central bank acts to avert short-term credit crunch

There’s a good take on the FT too: Central bank acts to ease China cash crunch fears

Over to our Springfield correspondent

This cartoon is doing the rounds again — highlighting the difference between merely buying fewer bonds with newly made money, and actually selling them or raising interest rates.

Updated

The Wall Street Journal has a good round-up of City reaction to the Fed’s tapering.

It confirms that the modest pace of the move (just $10bn in January), and the new commitments to keep interest rates low, have calmed investors’ fears

‘Clear Message Received’: European Investors React to Fed Tapering

Here’s a flavour:

Sandra Holdsworth, portfolio manager at Kames Capital, which manages £53 billion of assets:

“It’s only a small reduction in the pace of purchases, which is why risky assets haven’t reacted negatively. The FOMC statement also reflects the market’s view on the outlook for the U.S. economy more closely, which is a big relief. We remain positive on peripheral markets while we expect Treasury yields to rise over the next 6-9 months but only modestly, as a rise in medium and long-term yields will encourage some investors to move further out the yield curve.”

Neil Wilkinson, a senior fund manager at Royal London Asset Management, which oversees more than $73.5 billion of assets:

“It’s a clever move from the Fed. On balance it is a surprise that tapering occurred now, but emphasising the data-dependency of future tapering, and reiterating that it is not just the headline unemployment figure that they are focusing on but a number of measures, allows them to anchor expectations that rates will remain lower for longer, and that tapering will not be aggressively applied.”

In Greece, meanwhile, the unemployment rate fell slightly in the third quarter of this year, but remains depressingly high.

The jobless rate inched down to 27%, from 27.1% in April-June. It was still higher than a year ago (24.8%), and more than twice the eurozone average (12.1%).

The unemployment rate for women remains considerably higher than for males (31,3% versus 23.8%), Elstat reported.

And the youth unemployment rate was 57.2%

Irish economic growth picks up

Just in: Ireland’s economy posted surprisingly strong growth in the third quarter of the year.

It’s good news for Dublin in its first few days since exiting its eurozone bailout.

The central statistics office reports that Irish gross domestic product increased by 1.5% in the July-September quarter. GNP (which strips out the impact of multinationals) jumped by 1.6%.

Consumer spending picked up by 0.9%, but exports shrank by 0.8% — perhaps due to weak demand from euro neighbours.

Growth in the second quarter was also revised upwards (Q2 GDP up to +1.0%, from +0.4%; Q2 GNP up to -0.1% from -0.4%).

The CSO reported strong growth in many industries, saying:

Distribution,transport,software and communication increased by 2.1 per cent in volume terms between the second and third quarters of 2013.

Industry (including Building and construction) increased by 2.2 per cent and Other services increased by 1.2 per cent in volume terms on a seasonally adjusted basis over the same period.

On the other hand Public administration and defence decreased by 1.0 per cent and Agriculture, forestry and fishing declined by 2.9 per cent between the second and third quarters of 2013.

Here’s the full details.

Photos: protests in Brussels ahead of Summit

Hundreds of protesters have blocked traffic around the site of the European Union summit in Brussels, in an anti-austerity protests.

Farmers are leading the protests. Tractors and bales of hays obstructed entry to the main road leading up to the EU headquarters in Brussels during morning rush hour on Thursday, only hours before the leaders open their summit.

Wooden pallets were set ablaze at one road to block traffic.

Bruno Dujardin of the CNE union said the demonstrators are seeking:

A Europe for the people, which respects the workers and allows all European workers to have decent working conditions.

(Via AP).

Updated

Ian Traynor: EU leaders look to strengthen the euro

Back to the EU leaders summit in Brussels which kicks off shortly.

Europe editor Ian Traynor explains that leaders will attempt to finalise crucial measures on banking reform to strengthen the single currency. At the heart of the issue is Germany’s insistence that weaker nations should commit to make structural reforms, and that the cost of bank rescues should not be shared too widely.

Here’s a flavour:

European leaders gather in Brussels on Thursday for a two-day summit aimed at shoring up the euro, pooling economic reform efforts and entrenching a radical new regime for controlling most of the eurozone banking sector.

The summit begins after late-night negotiations in Brussels saw finance ministers thrash out a complicated compromise deal that left national governments ultimately responsible for bailing out their banks.

Taken together, the policies amount to the biggest moves attempted by the 17 governments of the single currency since the euro and sovereign debt crisis exploded four years ago. The action being plotted is highly contentious, the policies are divisive. The main issue is what chancellor Angela Merkel of Germany wants, what she does not want, and what she might get in the end.

“They are trying to solve a German problem,” said a senior EU official.

Here’s the full analysis:

European leaders gather for summit after complicated banking compromise

And Rob Wood of Berenberg is concerned that UK retail sales volumes have risen by just 0.7% since July:

Retail sales are the one data reading not signalling runaway growth in the UK.

Indeed, they point to a notable cooling since the summer, in contrast to all the business surveys.

That 0.3% rise in UK retail sales in November suggests shoppers were handing back for bargains as Christmas gets closer, says economics editor Larry Elliott 

And with real wages still falling, households have a good reason to approach the festive season cautiously.

Howard Archer, UK economist at IHS Global Insight, reckons:

With purchasing power being limited by consumer price inflation running well above earnings growth for a prolonged period, it is likely that many people have felt the need to control their spending after spending at a rapid rate in the third quarter.

While shares rise, bonds are calm. The Fed appears (at pixel time) to have begun the process of slowing its purchases of US government debt without driving down prices (and thus pushing up borrowing costs).

British gilts (debt issued by the UK) have dropped a little in value, pushing up the effective interest rate on 10-year UK bonds to 2.94% from 2.92% yesterday. But such a small move shouldn’t cause any alarm.

European stocks at two-week high

Back in the markets, the index of major European companies has climbed to a two-week high.

The rally is still being driven by last night’s Fed decision and its commitment to hold borrowing costs down until well into 2015 (see opening post onwards for details).

The FTSEurofirst 100 is up 1.4% this morning to its highest level since early December, led by blue chip companies like Axa, IG and Deutsche Telecom (all up over 2.75%).

Daniel McCormack, strategist with Macquarie, explains that investors are reassured by the Fed:

The overall announcement is not as hawkish as it first appeared. As the Fed announced the taper, it also pushed out expectations for when it is going to lift the policy rate.

Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, agreed:

By tapering now, Bernanke has taken away quite a bit of the short-term market risk. He took away with one hand some of the stimulus, but gave it back by the other by stressing that short-term rates won’t go up for a longer period.

A small gobbet of UK economic news — retail sales rose by 0.3% in November, boosted by increased sales of warm clothes as the weather turned more wintery. That’s in line with forecasts.

The big question is whether December is proceeding as well as hoped. Some analysts are worried, sending Marks & Spencer and Debenham’s shares sliding yesterday.

EU ministers reach agreement on banking union

While attention was on the Fed last night, European finance ministers were hamming out a crucial deal on banking union, ahead of a European summit today and tomorrow.

Important breakthroughs were made in the early hours of this morning. EU ministers agreed a broad agreement for an an agency and a €55bn fund to shut troubled banks as soon as the European Central Bank starts to police them next year.

As Reuters explains:

European leaders, who will gather in Brussels later in the day, will sign off on it and the final touches will be made in negotiations with the European Parliament next year.

“The final pillar for the banking union has been achieved,” Germany’s Finance Minister Wolfgang Schäuble told journalists.

But…. there are concerns that the new framework may not be nimble enough to deal with a failed bank (18 member countries need to be consulted).

And Germany also refused to allow the Eurozone’s bailout fund to be used to rescue a failing bank directly. Instead, if funds aren’t available elsewhere (either via the €55bn fund or the taxpayer), a country would have to make the request itself.

Our Europe editor Ian Traynor explains that ministers were under pressure to raise a deal before EU leaders start their own two-day summit today.

He writes:

There will be big problems with getting the deals agreed with the European parliament, and with national ratifications of a new treaty between participating governments on the funding of banking resolution.

The French-led group of southern countries, the European commission and the ECB opposed this.

“It’s a choice between a banking union that’s not perfect, or nothing,” said a senior EU official.

Leaders are heading to Brussels now — David Cameron and Enda Kenny have paid an important visit to Flanders first.

The gold price just dropped to a new five-month low of $1,200/ounce, pushed down by the stronger dollar and renewed optimism over economic prospects

Updated

Mike van Dulken of Accendo Markets, agrees that the Fed’s upbeat view of the US economy, and its renewed commitment to record low interest rates, is calming fears in the markets.

Finally, he adds, investors see tapering as an positive sign that conditions are improving, rather than fretting about less easy money next year.

The Fed’s move has been driven by improved US data (jobs, growth, spending, investment) and political progress (note the senate passed the bipartisan budget overnight), and balanced by a reinforcement of forward guidance that interest rates will stay very low for a ‘considerable time after QE ends’ and until unemployment falls below 6.5%’.

The dovish boost to forward guidance has served to reassure markets (as the Fed will have hoped) that stimulus-tapering does not equate to true policy-tightening, with emphasis that sub-target inflation remains a concern, that future decisions will remain data-dependent and that it can adjust to changing conditions [ie,by pausing the taper].

Full round-up of the European markets

Definitely a rally across Europe:

  • FTSE 100: up 72 at 6564, + 1.1%
  • German DAX: up 127 points at 9309, +1.39%
  • French CAC: up 60 points at 4170, +1.5%
  • Spanish IBEX: up 209 points at 9,650, +2.2%
  • Italian FTSE MIB: up 267 points at 18,398, + 1.4%

Robin Bew of the Economist Intelligence unit predicts that the Fed’s move could cause some alarm in emerging markets (EMs) next year…..

While Société Générale analysts reckons there will be fewer jitters than last summer, when the prospect of tapering hit markets hard (although predictions of EMageddon proved wide of the mark)

FTSE early risers

Here’s the full list of top risers on the FTSE 100, which has settled around 1% higher as European markets join the Fed-inspired rally. No sign of taper trepidation yet….

The Santa rally?

Ishaq Siddiqi of ETC Capital reckons the “Santa rally”* has finally begun, and welcomes the news that the Fed is finally slowing its stimulus plan:

The Fed made the right call to start tapering, removing much of the uncertainty in the market of the timeline in which it will consider taking action.

This should in turn remove much of the volatility that we have seen in the final quarter of 2013, gearing us up for a delayed but eagerly anticipated “Santa Rally” to finish this year in a bang and kick of the next year in an upbeat fashion.

The US economy is improving… the euro zone is in a better shape than it has been in over 3 years, Japan’s economic policies are taking effect, China has a long term growth plan in place and the UK’s economy is performing better than policymakers even anticipated – the world is not in a bad shape at all so there’s much to cheer about.

* – markets traditionally romp ahead in the final days of the year

Shares rise…..

Europe’s stock markets are open, and shares are indeed rising.

The FTSE 100 is up 60 points in 6552, a gain of 0.9%, led by Prudential (up 2.5%) and BAE Systems (2%).

The other main markets are also up at least 1%, as European traders take the taper in their stride.

Why shares aren’t tumbling

For months, we’ve spoken about QE being a punchbowl that central bankers were reluctant to take away. So why didn’t markets tumble last night on the news that the Fed was finally tapering?

Three reasons:

1) at $10bn, this is a relatively gentle taper. If the Fed continued cutting at that rate, it wouldn’t stop buying bonds until beyond next summer (October) or even December (updated)

2) the Fed has said it would change the rate if conditions deteriorate;

3) and it has also indicated that interest rates will remain at record lows for more than another year.

Stan Shamu of IG fleshes this out:

Firstly, the Fed reinforced its low Fed funds rate outlook with the key line being ‘it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%’. With inflation remaining benign, the majority of Fed members expect the first rate hike in 2015.

Secondly the tapering amount has been deemed by many analysts as a ‘token taper’ and essentially just allows the Fed to test the waters and assess conditions further.

Thirdly, the taper has been on the back of rapidly improving conditions while the Fed reinforced that asset purchases are not on a pre-set course and will be adjusted accordingly. On this notion we can only assume that if conditions worsen, the situation will be adjusted accordingly. All things considered, a solid economic improvement for the US will help the global recovery along and ultimately company earnings along with equities.

Updated

Here’s the details of the rally in Japan overnight, from Reuters:

Japan’s Nikkei share average rose to its highest close in six years on Thursday on the back of a big drop in the yen after the U.S. Federal Reserve announced it would start unwinding its historic stimulus.

Japanese equities were bolstered by a surge in the dollar/yen to over five-year highs in the wake of the Fed decision, underscoring the benefits of a weak currency for Japan’s export-reliant economy.The Nikkei added 1.7% to close at 15,859.22, its highest close since Dec. 2007.

During trade, it rose as high as 15,891.82, a hair’s breath away from its May high of 15,942.60. It was a third day of gains for the Nikkei.The Topix gained 1.0% to 1,263.07, with all of its 33 subsectors in positive territory.

Volume was high, with 2.9 billion shares changing hands.The Fed said it would reduce its monthly asset purchases by $10 billion to $75 billion, and indicated that its key interest rate would stay at rock-bottom even longer than previously promised.

Updated

Fed gives markets the Christmas spirit

Good morning. World stock markets are set to rally today today after last night’s historic decision by the Federal Reserve to begin scaling back its huge stimulus programme.

The move to begin tapering the Fed’s $85bn per month bond-buying programme by $10bn in January, alongside a new pledge to keep interest rates low for an extended period, is being taken as a sign of renewed confidence in the US economy.

After five years of unprecedented stimulus measures on both side of the Atlantic, the Fed’s move is a landmark moment in the financial crisis. The $10bn cut is being seen as a modest start to tapering, lighting the blue touchpaper under market optimism.

Japan’s stock market has hit a new six-year high overnight, and the Australian market jumped 2% (as mining stocks rose on the back of economic optimism).

We’re expecting a strong start to trading in Europe — with the main indices tipped to rise almost 1% — after Wall Street hit a record high last night.

Although the Fed is starting cautiously, it sees signs of underlying strength in the US economy – and believes it can cope without such huge monthly injections of fresh money. We’ll find out over time if it’s right, and what the implications for the world economy will be.

As Wall Street correspondent Dominic Rushe explained last night:

Ben Bernanke, entering his final days as chairman of the US central bank, surprised many economists who had expected the Fed to wait until the new year to “taper” the so-called quantitative easing (QE) stimulus program.

But following a series of strong jobs growth numbers the Fed’s open markets committee said “cumulative progress” had been made in the US’s economic recovery and it was scaling back its $85bn a month bond-buying programme to $75bn.

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labour market conditions, the committee decided to modestly reduce the pace of its asset purchases,” the Fed said in a statement.

At a press conference Bernanke said he expected the Fed to take “similar moderate steps” throughout 2014, suggesting the programme could end by late next year. However he cautioned that the Fed would halt the cutbacks if the economic indicators worsened.

More here: Federal Reserve to taper economic stimulus on heels of strong jobs growth

Emerging economics could still be watching nervously, as the recent inward flow of capital could reverse, and their currencies could weaken. But there’s been no panic in emerging markets yet…..

And with UK unemployment falling so much yesterday, and European ministers hammering out the details of banking union overnight (of which more shortly), 2014 looks a little less daunting….

Here’s the opening calls from IG:

  • FTSE: 6555, +63 points
  • Germany’s DAX: 9267, +85
  • France’s CAC : 4150, +40
  • Spanish IBEX: 9536, +92
  • Italian MIB: 18272, +141

I’ll be tracking reaction to the Fed’s move, and other key developments, through the day….

Updated

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Larry Elliott: It is hard to see how the Fed can start to scale back its quantitative easing program this year. Nobody is sure any longer what the Fed is really up to. What will it take for the Fed to start winding down the stimulus?…

 


Powered by Guardian.co.ukThis article titled “Federal Reserve tapering decision has baffled the markets” was written by Larry Elliott, economics editor, for The Guardian on Thursday 19th September 2013 17.19 UTC

The dust was still settling on Thursday after the Federal Reserve delivered one of the biggest surprises to financial markets in many a year. This was a return to the central banking practices of the past when policymakers liked to keep people guessing about their intentions. These days central bankers pride themselves on their transparency.

But nobody is sure any longer what the Fed is really up to. Clearly it got cold feet about announcing even the most modest reduction in the amount of stimulus provided to the US economy through its long-term asset purchase programme, but both the decision and the way it was announced raised more questions than they answered.

Why was there no warning to the markets that the Fed was worried about the slowdown in growth? Why, in the absence of such a warning, did it not go ahead with a tokenist reduction in the stimulus, of say $5bn (£3.17bn) a month, that would have made good the commitment to start tapering but had no material impact on growth? What will it now take for the Fed to start winding down the stimulus?

But although the Fed’s communications strategy now lies in tatters, some conclusions can be drawn from the postponement of the taper. Firstly, policy is going to remain loose for longer than the markets envisaged. It is hard to see how the Fed can start to scale back its quantitative easing programme this year, and the prospect of the process being completed in 2014 – as originally envisaged – is as good as dead.

Secondly, the Fed is even more doveish than the markets thought. When Ben Bernanke first floated the idea of the taper back in May, the notion was that the trigger for the taper would be falling unemployment. But despite a continued moderate improvement in the labour market, the Fed still feels the time is not ripe to act. It took fright when speculation about the taper led to rising bond yields, making mortgages more expensive. It looked askance when share prices fell. And it is worried about the possible consequences of the looming budget showdown between Democrats and Republicans in Washington. So when the time came to act, it blinked.

Thirdly, the Fed has provided a respite – albeit probably temporary – to emerging markets that had seen their currencies fall against the dollar in anticipation of a gradual withdrawal of the stimulus.

Finally, the muted second day reaction to the decision was the reaction to one final unanswered question: does the Fed have the remotest idea how to unwind the stimulus? As Stephen Lewis of Monument Securities put it: Bernanke has given the “impression of being astride a tiger he dare not dismount.”

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

No ‘taper’ to central bank’s support of US economy. Fed requires ‘more evidence that progress will be sustained’. Markets cheer the announcement while the US dollar falls. The Fed’s decision underlines the fragility of US recovery…

 


Powered by Guardian.co.ukThis article titled “Ben Bernanke: no change in Federal Reserve’s stimulus – live” was written by Tom McCarthy in New York, for theguardian.com on Wednesday 18th September 2013 21.15 UTC

Summary

We’re going to wrap up our live blog coverage. Here’s a summary of where things stand:

• The Federal Reserve announced no change to its program of monthly asset purchases designed to stimulate the economy. The central bank will continue to buy mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. ”The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the central bank said in a statement.

The news sent markets through the ceiling. The Dow Jones Industrial Average, which had been concerned that the central bank would take the economy off life support, hit an all-time high on the announcement.

• However the decision to maintain the stimulus pointed to a diagnosis on the part of the Fed of sustained, underlying economic weakness. In June, Fed chairman Ben Bernanke said the central bank may begin tapering its asset purchases. There was no sign of such talk today, three months later.

• Bernanke said that unemployment was lower but not low enough (the Fed has set a 6.5% benchmark) and growth is up but not far enough. Bernanke said the current unemployment rate of 7.3% “understates the amount of true unemployment in the economy” because of the job markets cycle and demographic trends.

• The news floored analysts and reporters, who reminded Bernanke that as recently as June he was talking about “tapering” quantitative easing. “I don’t recall stating that we would do any particular thing in this meeting,” he replied.

• Bernanke said the economy continued to show signs of recovery, and sectors closest to the QE program – housing and autos – showed some of the best improvement. “There has been a lot of progress,” he said. “Labor market indicators are much better today than they were when we began… more than a year ago.”

• Bernanke warned of the potential “very serious consequences for financial markets and the economy” if the country defaults on debt or if the federal government has to shut down due to a congressional failure to reach a budget deal.

• Bernanke dismissed the idea that quantitative easing is turning, against the central bank’s will, into a very long-term policy. He said easing would last until there’s “substantial improvement” in the outlook of the labor market. At the moment there’s some improvement, he said, but “ultimately we will reach that level of substantial improvement.”

Updated

Bernanke is done. The news conference has ended. For the time being, he’s not going anywhere.

Pushing back against the impression that Fed policy helps the affluent most, Bernanke says the Fed is working to help the middle class by seeking to strengthen the jobs market and ensuring price stability.

He acknowledges that the rich are getting richer and the poor are getting poorer. Then he says the Fed can’t do much about that:

Our economy is becoming more unequal. The very rich people and the people in the lower half who are not doing well.

This has been going on for decades…. It’s important to address these trends, but the Federal Reserve doesn’t really have the tools to address these long-run… trends.

Bernanke says there are signs quantitative easing is working: 

It’s difficult to get a precise measure. There’s a large academic literature.. . my own assessment is that it has been effective… some of the leading sectors like housing and autos” are tied most directly to asset purchases.

There has been a lot of progress. Labor market indicators are much better today than they were when we began… more than a year ago.

Bernanke addresses the question raised by my colleague Dominic Rushe earlier. If the economy continuously fails to meet the benchmarks the Fed has laid out for ending asset purchases, how will it ever get out of QE?”

“The criterion for ending purchases is a substantial improvement in the outlook for the labor market,” Bernanke says. He says there has been some improvement and “ultimately we will reach that level of substantial improvement.”

Then easing can end.

A potential failure next month in Congress to raise the debt limit or pass a budget is “obviously part of a very complicated set of legislative decisions, strategies, battles” that Bernanke won’t comment on.

But he says “a government shutdown and failure to raise the debt limit could have very serious consequences for financial markets and the economy.”

Bernanke says the central bank tries to take into account such potential threats, but the Fed is relatively powerless in this field.

Is the Fed concerned about confusing investors by mentioning tapering and then not doing it?

I don’t recall stating that we would do any particular thing in this meeting. What we are going to do is the right thing for the economy, Bernanke says… We try our best to communicate.. We can’t let market expectations dictate our policy actions.

The markets really like it. 

0-2: At the start of the blog we speculated that Bernanke might simultaneously announce that he’s winding down QE and winding down his career as Fed chairman. In fact he has done neither.

Bernanke is asked whether he’s leaving:

“I prefer not to talk about my plans at this point.”

Could tapering begin by the end of 2013? Bernanke says there’s no fixed schedule:

There really is no fixed calendar… If the data confirm our basic outlook… then we could move later this year. But even if we do that, the subsequent steps will [rely] on continued progress in the economy.

The criteria include an improved labor market including lower unemployment.

Bernanke is asked whether he was speaking out of turn in June, when he said the fed could start tapering its stimulus program. Was it a mistake to talk about tapering back in June?

I think there’s no alternative … but to communicate as clearly as possible. As of June we had made meaningful progress in terms of labor [market],” Bernanke says. He says green shoots in the jobs market convinced the committee that it was the time to start talking tapering.

The question: what changed, to make the talk stop?

Updated

Bernanke says low job market participation is partly cyclical:

“There’s a cyclical proponent to participation. The unemployment rate understates the amount of true unemployment in the economy.”

“There’s also a downward trend in participation in our economy,” Bernanke says, but he pins the trend on external factors including an aging population.

The focus of course is on the Fed’s decision to leave its asset purchase program unchanged but a relevant question is “why.” “It seems as though there are two major reasons for the decision,“ Guardian business correspondent Dominic Rushe (@dominicru) writes:

1. The rise in mortgage rates is contributing to a tightening of financial conditions, which the Fed is obviously worried about.

2. The Fed inserted a new sentence that begins with “taking into account the extent of federal fiscal retrenchment.” The Fed has long been worried about their fiscal brethren and that worry crept further into today’s statement.

Even though the Fed acknowledges that things have picked up since they began QE3 late last year, they “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

This is not what we expected. However it is, from the Fed’s point of view, understandable.

But there’s a rather unsettling conclusion to Dominic’s analysis:

However, if the tightening of financial conditions, which was partially a result of the Fed’s decision to discuss slowing asset purchases, is enough to forestall an actual reduction, then in theory the Fed can never cease purchasing assets unless there is no adverse reaction in asset markets. It becomes a negative cycle in which the Fed would find itself trapped.

Guardian finance and economics editor Heidi Moore (@moorehn) is performing Bernanke-to-English tranlsation:

Bernanke says there are signs the economy is improving.

He says that unemployment is falling [Editor: if only by 1.8% over the last two years]; 2.3m private sector jobs have been created; aggregate hours of work are up; and weekly unemployment claims are falling. ”

All this “despite substantial fiscal headwinds,” Bernanke says.

Bernanke is discussing the FOMC projections for interest rates, unemployment and inflation.

He says the collective projections of the committee members have rates moving from 2.0-2.3% in 2012 to 2.5-3.3% in 2016.

Unemployment is expected to move from 7.1-7.3% in 2013 to 5.4-5.9% by 2016, “about the long-run normal level.”

Inflation is projected to move from 1.1-1.2% in 2013 to 1.7-2.0% in 2016.

Updated

Bernanke is speaking. Watch live on CSPAN here.

Anything to instill confidence?

Updated

If the Fed keeps buying long-term government debt – and the board of governors just announced that that will continue to the tune of $45bn per month – return to investors on that debt will not be as strong. Also see this chart:

Bloomberg columnist Caroline Baum posed this question for Bernanke in the event that the Fed decided to maintain its stimulus program, which it now has: Why?

Various Fed studies suggest that the third round of asset purchases has had a negligible effect on long-term interest rates, that the real benefit comes from forward guidance. Why, then, have you decided to stick with the program? Ten-year yields are up 120 basis points since May. Any bang for the buck seems to have dissipated.

Read Baum’s Ten Burning Questions for Ben Bernanke here.

Fed chair Ben Bernanke is scheduled to meet the press in about 10 minutes. He’s likely to face sharp questions about why the Fed has decided to stick with a policy, quantitative easing, that seems to have born little fruit over three rounds and almost five year.

Guardian finance and economics editor Heidi Moore (@moorehn) sees the move as a symptom of how dire the economic situation is. Easing isn’t working – but there isn’t a plan B.

Try, try again. And again. And

What just happened? You can read the full Fed board of governors statement on the decision that has emerged from the two-day meeting of the open markets committee here.

In short the central bankers did not judge the economy to have hit benchmarks that would have dictated a change in stimulus policy – in this case slowing the purchase of mortgage-backed securities, Treasury bills and bank debt.

At a deeper level, the Fed self-evidently retains belief in these levers to move the economy. The tools still work, this decision says, and the Fed intends to keep applying them.

Here’s the key graph from the Fed statement, with this key sentence: ”the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

Read the full Fed statement here.

The markets like it.

Updated

Guardian business correspondent Dominic Rushe has some early details of the Fed announcement that it has no immediate plans to phase out or “taper” its $85bn-monthly asset purchase program.

The Fed says it is waiting for “more evidence that progress will be sustained before adjusting,” Dominic reports.

Reactions

No taper. More to come. 

And …

All the major US stock markets are trading slightly lower ahead of Fed announcement, GuardianUS business correspondent Dominic Rushe (@dominicru) reports:

 The S&P 500 is down 0.11% and the Dow 0.26%. Blame nerves. As until the announcement comes this afternoon, no one outside the Fed really knows whether Bernanke is going to start the “tapering” the $85bn a month quantitative easing stimulus programme or not.

That shoe took a long time to drop. President Obama is prepared to name Federal Reserve vice chairman Janet Yellen as the next chairwoman of the Federal Reserve, the Washington Post reports, citing a White House official and “people close to the White House”:

Federal Reserve Vice Chairman Janet Yellen is the leading candidate to be President Obama’s nominee to lead the Fed as chairman, a White House official said Wednesday. Barring any unexpected development, that likely means that Yellen will get the nomination, perhaps as soon as next week.

People close to the White House said this week that Yellen was the front-runner after the unexpected withdrawal by former White House economic adviser Lawrence Summers, who was facing sharp resistance on Capitol Hill.

Full piece here. Summers’ withdrawal did not leave Yellen the lone horse in the race, however. Wonkblog’s Neil Irwin today handicapped a competition between Yellen and Donald L. Kohn, her predecessor as Fed vice chairman. Irwin concluded it could go either way on the merits, but Yellen may be the more politically expedient choice:

The president has a choice between two very qualified, experienced central bankers for the job, with the differences between them more subtle variations in style and temperament than any vast chasm in monetary policy views. Against that backdrop, if he passes over Yellen, who would be the first woman in the job and has been endorsed by Wall Street economists and many in Congress, he’ll face tough questions on why.

Read the full piece here.

“After three years of money-pumping, quantitative easing is evidently doing nothing to bring the country to full employment, which is one of the two tasks the Fed exists to perform,” Guardian finance and economics editor Heidi Moore (@moorehn) wrote at the start of this month. That’s one reason “it’s worth examining whether QE has outlived its usefulness”:

The hard news is this: it’s a smart idea for the Fed to taper, to start opening the door for the end of stimulus. It’s not a smart idea because the economy is healthy – it isn’t – but because the economy needs to come off life-support and breathe for itself.

Quantitative easing is a drug that seems to be long past its due date. After three years, the returns are in: there are likely no more benefits coming to the economy from holding down interest rates and buying up mortgage bonds.

The economy isn’t recovering, Heidi writes; it’s “in some kind of unresponsive fugue state that we’ve arbitrarily chosen to call a ‘recovery.‘” Read the full analysis here.

Good midday and welcome to our live blog coverage of Ben Bernanke’s eagerly awaited remarks on two topics he uniquely owns: quantitative easing and Ben Bernanke. There’s a chance the Fed chair will use his press conference this afternoon to show them both the Out door.

There’s money on the line. Markets will be listening for signals that the Federal Reserve bank plans to wind down its $85bn in monthly asset purchases known as quantitative easing. For nearly five years the stimulus program has helped markets find confidence in a discouraging landscape. Bernanke has signaled that it won’t last forever. But it was supposed to last until the economy – and specifically the unemployment rate – improved. Or until rising interest rates grew too worrisome.

Neither has happened. The landscape remains discouraging, with unemployment at 7.3% and job market participation at an all-time low. Inflation has yet to rise to the 2% target Bernanke has proposed (he calls it the “objective” rate).

Clearly, easing isn’t working. Unless it is, and the numbers would be even more terrible without it. For two days the fed’s open markets committee (FOMC) has been discussing this and other questions. This afternoon Bernanke is expected to indicate what the group decided.

Additionally Bernanke may talk about his own plans to step down as Fed chair, a seat he’s occupied since President George W Bush appointed him in 2006. The conclusion that Bernanke will leave when his current term expires at the end of January is so foregone that the secret struggle to replace him already has produced public losers.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

After years of the Fed pumping $85bn a month into financial markets, the strength of the American recovery will be tested. The Federal Reserve chairman is expected to make the symbolic gesture this week of announcing the beginning of the end of QE…

 


Powered by Guardian.co.ukThis article titled “Bernanke set to begin Fed’s tapering of QE – but is the US economy ready?” was written by Heather Stewart and Katie Allen, for The Guardian on Sunday 15th September 2013 20.25 UTC

As Barack Obama gears up to announce Ben Bernanke’s successor, the Federal Reserve chairman is expected to make the deeply symbolic gesture this week of announcing the beginning of the end of quantitative easing – the drastic depression-busting policy that has led the Fed to pump an extraordinary $85bn (£54bn) a month into financial markets.

It will signal the Fed’s belief that the US economy is on the mend, but it could also frighten the markets and hit interest rates. So what exactly is Bernanke doing, why now – and how might it affect the UK and other countries?

What will the Federal Reserve do?

After on Tuesday and Wednesday’s regular policy meeting, the Fed is widely expected to announce that it will start to “taper” its $85bn-a-month quantitative easing (QE) programme, perhaps cutting its monthly purchases of assets such as government bonds by $10bn or $15bn.

Is that good news?

It should be: it means the governors of the Fed, led by the chairman, Bernanke, believe the US economy is strong enough to stand on its own, without support from a constant flow of cheap, electronically created money – though they still have no plans to raise base interest rates from the record low of 0.25%, and they expect to stop adding to QE over a period of up to a year. “We really want to see a situation where central banks should not be pumping money into markets. It’s not a healthy thing to be doing,” says Chris Williamson, chief economist at data provider Markit.

Why are they doing it now?

Economic data is pointing to a modest but steady recovery. House prices have turned, rising by 12% in the year to June. Unemployment has fallen to 7.3%, its lowest level since the end of 2008, albeit partly because many women and retirees have left the workforce.

Since QE on such a huge scale carries its own risks – it can distort financial markets, for example – the Fed is keen to withdraw it once it thinks an upturn is well underway. However, some recent data, including worse-than-expected retail sales figures on Friday, have raised doubts about the health of the upturn.

There’s another reason too: Bernanke’s term as governor ends in January next year, and he may feel that at least making a start on the process of tapering – marking the beginning of the end of the policy emergency that started more than five years ago – would be a fitting end to his tenure.

How will the markets react?

With a shrug, the Fed hopes, since it has carefully communicated its intentions. Scotiabank’s Alan Clarke said: “I think it’s pretty much priced in … Speculation began months ago, the market has already moved and we are still seeing some very robust data. The foot is on the accelerator pedal just a bit more lightly.”

However, a larger-than-expected move could still cause ripples – and a decision not to taper at all would be a shock, though some analysts believe it remains a possibility. Paul Ashworth, US economist at Capital Economics, said: “I don’t think they’ve actually decided on this ahead of time.”

What will investors be looking for?

First, the scale of the reduction in asset purchases. No taper at all might suggest Bernanke and his colleagues have lingering concerns about the health of the economy; a reduction of $20bn a month or more would come as a shock. The tone of the statement, and the chairman’s subsequent press conference, will also be scrutinised, with markets hoping for reassurance that even once tapering is underway, there is no immediate plan to raise interest rates: Bernanke has previously said he doesn’t expect this to take place until unemployment has fallen to 6.5% or below. Williamson said: “I think they will accompany the announcement with a very dovish statement designed not to scare people that the economy is too weak but to reassure stimulus won’t be taken away too quickly.”

What does it mean for the UK?

Long-term interest rates in UK markets have risen sharply since the early summer, at least in part because of the Fed’s announcement on tapering, and that shift, which has a knock-on effect on some mortgage and other loan rates, is likely to continue as the stimulus is progressively withdrawn.

If tapering occurs without setting off a market crash or choking off recovery, it may help to reassure policymakers in the UK that they can tighten policy once the recovery gets firmly under way, without sparking a renewed crisis. David Kern, economic adviser to the British Chamber of Commerce, said: “it will strengthen for me the argument against doing more QE in the UK.”

How will the eurozone be affected?

It could cut both ways: a strengthening US economy is a welcome market for Europe’s exporters, and if the value of the dollar increases against the euro on the prospect of higher interest rates, that will make eurozone goods cheaper.

However, the prospect of an end to QE in the US has also caused bond yields in all major markets to rise, pushing up borrowing costs – including for many governments. That could make life harder for countries such as Spain and Italy that are already in a fiscal tight spot.

What about emerging markets?

Back in May, Bernanke merely had to moot the idea of ending QE to send emerging markets reeling. A side-effect of the unprecedented flood of cheap money under QE has been that banks and other investors have used the cash to make riskier investments in emerging markets. The prospect of that tap being turned off has already seen capital pouring out of emerging markets and currencies, potentially exposing underlying weaknesses in economies that have been flourishing on a ready supply of cheap credit.

“It has triggered all sorts of significant movements around the world out of emerging markets. It’s had big ramifications for India and other parts of Asia,” said Clarke.

Central banks in Brazil and India have been forced to take action to shore up their currencies; Turkey and Indonesia also look vulnerable. Many of these markets have looked calmer in recent weeks, but the concrete fact of tapering could set off a fresh panic.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

According to the FOMC meeting minutes, “a few” officials were keen to make a move sooner and “a few” urged more caution. The minutes also revealed that some FOMC members were cautious about the still weak US recovery…

 


Powered by Guardian.co.ukThis article titled “Fed minutes show cautious move towards end of economic stimulus” was written by Dominic Rushe in New York, for The Guardian on Wednesday 21st August 2013 19.56 UTC

The Federal Reserve inched nearer to reining in its bn-a-month economic stimulus programme last month, according to the minutes of its last meeting which were released on Wednesday. But the central bank did not give any clear indication about when that scaling back might begin.

The minutes of the Federal Open Market Committee (FOMC) meeting which took place late last month offered a mixed view on committee members’ willingness to ease back on the so-called quantitative easing (QE) programme. According to the minutes, “a few” officials were keen to make a move sooner and “a few” urged more caution. The minutes also revealed that some FOMC members were cautious about the still weak US recovery. US stock markets were largely unchanged after the news was released.

Most FOMC members felt that growth in the economy would pick up in the second half of the year and further strengthen in 2014. According to the minutes: “A number of participants indicated, however, that they were somewhat less confident about a near-term pickup in economic growth than they had been in June.” The minutes described recent economic data as “mixed”.

The Federal Reserve chairman, Ben Bernanke, indicated in June that the stimulus programme could be scaled back later this year, if economic data continued to be positive. The news sparked a sell off in the equity markets but despite some volatility they have remained close to record highs.

The QE programme, the Fed’s third round of bond buying, is intended to keep rates low and encourage investment in the economy in the hopes of driving jobs growth. Bernanke has given no clear indication when any tapering in the massive bond-buying programme could begin; economists have speculated that it could come as soon as September or be delayed until next year.

The summary of the 30-31 July meeting said that while “a few [committee] members emphasized the importance of being patient and evaluating additional information before deciding on any changes to the pace of asset purchases”, a few others “suggested that it might soon be time to slow somewhat the pace of purchases”.

The signals from the US economy are broadly positive but there are still many concerns. Unemployment rates continue to inch down but remain relatively high. The Fed minutes said: “Private-sector employment increased further in June, but the unemployment rate was still elevated.” The US housing market appears to be on the mend but some have worried that a recent rise in interest rates could have an impact. “While recent mortgage rate increases might serve to restrain housing activity, several participants expressed confidence that the housing recovery would be resilient in the face of the higher rates,” the minutes said.

Bernanke is widely expected to announce his decision to resign as Fed chair. His third term comes to an end at the end of January 2014 and President Barack Obama has said that he will appoint a successor this autumn. Bernanke will hold a press conference after the FOMC’s next meeting, in mid-September.

The two most likely candidates to take over Bernanke’s job at present are the Fed vice-chair Janet Yellen and Larry Summers, a former Treasury secretary who is one of Obama’s closest economic advisers.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

During the press conference held to announce the BoE’s new forward guidance for interest rates, Carney made it clear the MPC plans to stay the course. Interest rates are to remain low, but what does that say about economic recovery, inflation and house prices?..

 


Powered by Guardian.co.ukThis article titled “Five things we learned from the Bank of England inflation report” was written by Phillip Inman, for theguardian.com on Wednesday 7th August 2013 14.37 UTC


1. Interest rates are going to stay low for a very long time

Current predictions say the Bank will only consider raising rates in 2016, but it could be 2017 or 2018 before the economy is considered strong enough to cope with higher rates. It will not consider raising rates until unemployment declines to 7% (from 7.8%), and its own forecast puts unemployment above 7% in 2016.

2. The current economic recovery is fragile

The UK might have seen a 0.9% jump in GDP in the first six months of the year, but the Bank of England is concerned that growth remains weak. The level of GDP is below where it was in 2008 and well below where it would be if the crash hadn’t happened. High unemployment shows there is slack in the economy that can be deployed without causing inflation.

3. Fears of a house price bubble are misplaced

Governor Mark Carney argued that the level of transactions are well below the peak (about a third lower) and house prices are still below the highest point in 2008, so a bubble is a long way off. And anyway, he said, the central bank now monitors the big lenders for dodgy or risky practices, so a repeat of the crazy lending in the first half of the last decade is unlikely.

4. Inflation is not a worry

This is not something the Bank of England has explicitly declared in its quarterly inflation report. It says monetary policy committee is still watching for any signs of inflation. However, there is little pressure from rising wages and it blames the current 2.9% rate (well above the 2% target) on the rising cost of train fares and regulated monopoly suppliers such as those related to water rates and gas prices.

5. More quantitative easing could be on the way

During the press conference held to announce the BoE’s new forward guidance for interest rates, Carney made it clear the MPC plans to “maintain the current highly stimulative stance of monetary policy” and could even extend it. The Bank is unlikely to cut rates further, but could boost QE. It has pumped £375bn into the financial system to promote lending to little avail (it might have been even worse without it, said Carney’s predecessor Lord King). Some analysts argue it should rise to £425bn.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

The two doves on the Bank of England’s Monetary Policy Committee, Paul Fisher and David Miles, switched their position to back new governor Mark Carney in a 9-0 vote to keep the size of the quantitative easing program unchanged at 375 billion pounds…

 


Powered by Guardian.co.ukThis article titled “Bank of England policymakers voted 9-0 to leave QE unchanged” was written by Heather Stewart, for theguardian.com on Wednesday 17th July 2013 09.19 UTC

Bank of England policymakers swung behind the new governor, Mark Carney, and voted unanimously against extending quantitative easing at this month's monetary policy committee meeting.

David Miles and Paul Fisher, the two MPC members who had repeatedly backed Sir Mervyn King's calls for an extension of the deflation-busting policy, decided instead to switch their votes and support Carney's plan of leaving QE unchanged, amid signs that economic recovery was becoming "more firmly established".

However, the minutes also showed that the MPC plans to use an August deadline to examine its policymaking remit, set by the chancellor, to establish "the quantum of additional stimulus required and the form it should take". That suggests Miles and Fisher may simply have decided to await next month's meeting before pushing for a fresh round of QE.

George Osborne has asked the Bank to announce next month whether it would like to adopt the policy of "forward guidance" – announcing how it expects interest rates to move to influence market expectations.

The MPC made a first foray into forward guidance at its meeting a fortnight ago, taking the unusual step of issuing a statement to financial markets warning them that interest rates were unlikely to rise.

When Carney was governor of the Canadian central bank, he pledged to keep interest rates low for 12 months, helping to calm fears in financial markets that borrowing costs were about to rise. However, some MPC members are known to be unenthusiastic about the idea.

July's meeting took place during the so-called "taper tantrum", when the Federal Reserve chairman Ben Bernanke's plan to phase out its programme of QE prompted share prices to plunge and bond yields to spike, pushing up interest rates across many economies.

The minutes show that MPC members were concerned by the "surprising" rise in UK government bond yields that followed Bernanke's remarks, and were keen to dampen expectations that interest rates were set to rise. In April, markets had not been expecting rates to go up until late 2016; by the time the MPC met, that had been brought forward to mid-2015.

"UK developments, while broadly positive, had not been enough to warrant such an upward move in the near-term path of Bank Rate," the minutes said.

Persistently weak real income growth – with high inflation more than outweighing paltry pay deals – was also highlighted as a risk to the recovery by MPC members: "Real income growth had remained weak … and it was unlikely that consumption growth could continue at its current rate without some rise in real incomes."

However, the MPC added that "developments in the domestic economy had generally been positive" and broadly in line with the moderately upbeat picture presented by the previous governor, Sir Mervyn King, at his final inflation report press briefing.

For "most members", therefore, "the onus on policy at this juncture was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely" – subject to keeping inflation on track to hit the government's 2% target.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Britain’s top companies lose £36bn in value as stock markets react to US warnings on QE and drop in Chinese manufacturing. Ben Bernanke, chairman of the Federal Reserve, hinted on Wednesday about a possible easing of its $85bn-a-month bond-buying programme, in a testimony to Congress…

 


Powered by Guardian.co.ukThis article titled “Stock markets lose nerve on fears of end to quantitative easing” was written by Nick Fletcher, for The Guardian on Thursday 23rd May 2013 18.13 UTC

A day after the FTSE 100 came within 90 points of its December 1999 all-time high, the index slumped 143 points yesterday to 6696, wiping £36bn off the value of Britain's top companies.

The 2.1% fall was the index's worst in one day since it lost just over 2.5% a year ago to the day, on fears that Greece could leave the eurozone. But after its recent strong surge this latest fall in the blue-chip index merely wipes out the gains made since last Friday.

Stock markets around the world tumbled from their recent highs as investors took fright at weak Chinese manufacturing data and signs that the US Federal Reserve might end its bond-buying programme sooner than expected.

Markets have been buoyed in recent months by the various measures taken by central banks to stimulate the global economy by flooding it with cash. Measures include printing money, buying up mortgage-backed bonds and keeping interest rates at historic lows. Much of the recent economic data indicated the policy was having the desired effect, while the long-running eurozone crisis seemed to have entered a period of relative calm.

But analysts have been warning that any signs the money taps were about to be turned off or that the global economy was not recovering as expected would be taken badly by the markets.

Thursday's rout began with comments late on Wednesday from the Federal Reserve suggesting that America could end its quantitative easing, or QE, programme in the near future, and accelerated after a Chinese survey showed factory activity had fallen for the first time in seven months in May. The Nikkei 225 dropped more than 7% overnight on Wednesday to 14,483, its biggest one-day fall for two years. However, analysts pointed out that the Japanese index had almost doubled in value since November, so was still well ahead for the year.

European stock markets fell, with Germany's Dax and France's Cac both closing around 2.1% lower, while Italy's FTSE MIB fell 3% and Spain's Ibex was down 1.4%.

On Wall Street the Dow Jones industrial average, which had reached an all-time high this week, fell sharply when trading opened on Thursdaybefore staging a recovery. By lunchtime the US index was down just 15 points following stronger than expected weekly jobless claims and home sales.

Rupert Osborne, futures dealer at City broker IG, said: "The stronger home sales and jobless claims … fit with the idea that the US economy is approaching a point where a reduction in stimulus is appropriate. This neatly illustrates the irony of the position; traders across the world are openly hoping for poor US data since this keeps the Fed involved."

Ben Bernanke, chairman of the Federal Reserve, had hinted on Wednesday about a possible easing of its bn-a-month bond-buying programme, in a testimony to Congress. These comments were later compounded by the minutes of the Fed's last policy-making meeting, which showed that some members thought such a move could come as soon as June, much earlier than any analysts had been expecting.

Michael Hewson, senior market analyst at financial spread-betting company CMC Markets UK, said: "There was an expectation after Bernanke's testimony on Capitol Hill that the latest Fed minutes wouldn't add too much to overall market expectations around the prospects for further easing against expectations of possible tapering.

"The release of the latest Fed minutes completely changed that dynamic with a single line, 'a number of participants express a willingness to reduce QE in June'.

"The disappointing Chinese manufacturing data gave markets the extra nudge over the edge that was needed and persuaded investors with money in the game to cash in."

In China the HSBC purchasing managers index fell to 49.6 points in May, from 50.4 the previous month. Any level below 50 produced by the survey of industry indicates a contracting sector. China is a major consumer of commodities, so the signs of a slowdown in the country put metal prices under pressure, with copper down more than 3%. Oil prices also slid lower, Brent crude falling nearly 1% to 2 a barrel.

But gold and silver edged higher as investors searched out safer assets amid the sell-off.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.