Market news

Bloomberg.com — The Bank of England lifted its benchmark interest rate to the highest since 2009 and policy makers put on a united front to say that further tightening will be needed to rein in inflation.

While the move was widely anticipated, few economists predicted the Monetary Policy Committee to close ranks behind the move with Brexit on the horizon. It unexpectedly voted 9-0 to lift the rate to 0.75 percent, the second quarter-point move since November.

The action is a vindication of Governor Mark Carney’s view back in May — when the BOE held off tightening — that a slump in growth in the first quarter would prove temporary. But increased uncertainty about Britain’s future relationship with the European Union and ongoing global trade tensions could mean that hiking now proves a risky move.

In the Inflation Report accompanying the decision, the BOE cut its forecast for global growth, though its predictions for Britain were broadly unchanged. While U.K. expansion is expected to be just 1.4 percent this year, it will average about 1.75 percent a year through 2020, slightly above the 1.5 percent potential.

If the economy grows as expected, “an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2 percent target at a conventional horizon,” the central bank said. It repeated its phrase that rate hikes will be limited and gradual.

New Forecasts

Similar to the last forecasts in May, the bank’s update on Thursday suggests that about one interest-rate increase a year will be enough. Carney will elaborate on the outlook at a press conference at 12:30 p.m. in London.

The forecasts see inflation slipping to 2.2 percent in 2019 from an average of 2.3 percent this year before settling at the goal in 2020.

The BOE is following the U.S. Federal Reserve in slowly raising borrowing costs from levels that are still at emergency lows a decade after the financial crisis. The European Central Bank is set to end its bond-buying program later this year.

The MPC said that while the Brexit-induced depreciation of the pound has helped exports, the uncertainty about future trade is damping investment. The two effects largely cancel each other out, and prospects for overall growth haven’t weakened. […]

Bloomberg.com — Asian stocks declined with the steepest losses in China as trade worries came back to the fore. Japan’s 10-year bonds swung as the central bank stepped in to temper yield gains following its policy tweaks earlier this week.

China and Hong Kong equity indexes led losses across the region with declines of more than 3 percent, while emerging-market currencies fell with developing nation stocks. Ten-year JGB yields touched 0.145 percent, the highest since February 2017, before paring gains as the Bank of Japan made an unscheduled offer to buy bonds. Treasury yields fell after reaching 3 percent this week for the first time since June as the Federal Reserve unanimously decided to leave rates unchanged while making it clear borrowing costs are headed higher. The offshore yuan edged lower.

Higher U.S. tariffs on Chinese goods look increasingly likely. President Trump asked the U.S. Trade Representative to consider increasing proposed levies on $200 billion in imports to 25 percent from 10 percent, which could be implemented as soon as next month. The move comes just as Washington and Beijing are exploring ways to get back to the negotiating table.

“Markets are now wary of the next step in the trade war between the U.S. and China,” Nick Twidale, chief operating officer at Rakuten Securities Australia, said in a note. “With the U.S. threatening to increase tariffs to 25 percent from 10 percent and the Chinese vowing not to react to ‘blackmail’ to get them back to the negotiating table, this could be the catalyst that tips sentiment and some markets into a tailspin especially as we enter the lower liquidity holiday trading season.”

With the Bank of Japan and Fed now out of the way, focus turns to the Bank of England. Later Thursday, the central bank is expected to raise its key rate by 25 basis points to 0.75 percent, with Bloomberg Economics projecting an 8-1 vote.

Elsewhere, oil steadied around a two-week low after a surprise gain in U.S. crude inventories exacerbated supply concerns. Turkey’s lira hit a record low as the U.S. imposed sanctions on its NATO ally over the imprisonment of an American pastor.

Bloomberg.com — Federal Reserve officials left U.S. interest rates unchanged and stuck with a plan to gradually lift borrowing costs amid “strong” growth that backs bets for a hike in September.

Economic activity has been “rising at a strong rate,” and unemployment “has stayed low,” the Federal Open Market Committee said Wednesday in a statement released in Washington. “Household spending and business fixed investment have grown strongly.”

While leaving rates on hold as expected, the committee repeated guidance for “further gradual increases” in its policy benchmark, lining up September’s FOMC meeting for the third hike of the year.

President Donald Trump lashed out at the Fed last month, saying he wasn’t “thrilled” it was raising rates. The comments threw a political cloud over the central bank’s decisions, though economists and investors had widely anticipated Wednesday’s decision.

Policy makers “are not really affected or paying close attention to the political commentary,” said Laura Rosner, senior economist at Macropolicy Perspectives.

Stocks and bonds shrugged off the Fed announcement, with the Standard & Poor’s 500 Index closing down 0.1 percent and the 10-year Treasury yield at 3 percent at 4 p.m. New York time. Odds for a rate hike at the central bank’s Sept. 25-26 meeting held around 80 percent.

“The FOMC did nothing to the statement that would suggest a lower likelihood of a September hike,” said former Fed Governor Laurence Meyer, who runs a policy research firm in Washington. “The market has now priced a September rate hike as a near-certainty, and we agree with that assessment.”

Fed Chairman Jerome Powell is trying to nurture the second longest U.S. expansion on record by slowly reducing the amount of support that monetary policy provides to growth. The economy is riding a tailwind from tax cuts and higher federal spending, though a trade war threatens to dent growth.

The committee described risks to the outlook as “roughly balanced,” and restated that “monetary policy remains accommodative” while leaving the target range for its benchmark policy rate at 1.75 percent to 2 percent.

Most Fed officials in June projected three or four rate hikes for 2018, implying one or two more moves this year.

“There’s a lot of concern that the trade negotiations and the heightened rhetoric surrounding trade negotiations might lead to slower economic activity later in the year,” said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “While it certainly looks like it’s all systems are go for another rate hike in September, and another one in December, the text hasn’t been written just yet on that.”

Pricing in federal funds futures markets imply odds slightly above 60 percent for a fourth rate hike in December.

Policy makers weighed their action against a generally positive backdrop. The U.S. economy grew at a 4.1 percent pace in the second quarter, its fastest pace since 2014. Inflation is close to the Fed’s 2 percent goal, rising at 2.2 percent for the year ending June, while the core rate that excludes food and energy was up 1.9 percent.

The committee noted in the statement that both headline and core inflation “remain near 2 percent.”

Unemployment was 4 percent in June, below the Fed’s 4.5 percent estimate of the level that reflects full employment. The gradual pace of rate increases shows that officials want to see if tight labor markets can continue to draw more people into the workforce and produce higher wages, without sparking unwanted inflation.

Wednesday’s decision was unanimous 8-0. Voting members shifted chairs at this meeting, with John Williams voting for the first time as New York Fed president and FOMC vice chairman, with Kansas City Fed chief Esther George taking his place as an alternate for San Francisco while it seeks a new president.

Bloomberg.com —  Companies added the most workers in five months to U.S. payrolls in July, a sign hiring remains strong despite a shrinking pool of qualified workers and headwinds from trade, according to data released Wednesday from the ADP Research Institute in Roseland, New Jersey.

HIGHLIGHTS OF ADP EMPLOYMENT (JULY)

• Private payrolls rose by 219k (est. 186k) after upwardly revised 181k gain in June
• Payrolls in goods-producing industries, which include builders and manufacturers, increased 42k after a 28k rise
• Service providers added 177k to payrolls, most since Jan., after 153k

Key Takeaways

The results, coming ahead of the monthly jobs report due from the Labor Department on Friday, are a positive sign for private payrolls. Demand for labor increased across a range of industries including professional and business services, health care and social assistance, leisure and hospitality, manufacturing and construction, the ADP report showed.

Employment growth, along with lower taxes and contained inflation, is helping to boost consumer spending, the biggest part of the economy. That’s also helping to cushion the headwinds from uncertainty related to import tariffs. Even with the labor market remaining solid, a sustained acceleration in wages has proved elusive so far in this expansion.

Economists Views

“The job market is booming, impacted by the deficit-financed tax cuts and increases in government spending,” Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said in a statement. Moody’s produces the figures with ADP. “Tariffs have yet to materially impact jobs, but the multinational companies shed jobs last month, signaling the threat.”

Other Details

• Hiring in construction rose by 17,000; factories added 23,000 workers
• Professional and business services boosted their workforce by 47,000 while health care and social assistance added 49,000 workers; leisure and hospitality added 37,000
• Companies employing 500 or more workers increased staffing by 48,000 jobs; payrolls rose by 119,000 at medium-sized businesses, or those with 50 to 499 employees, most since 2014; and small companies’ payrolls advanced by 52,000

Bloomberg.com — Asian equities rose and the dollar strengthened as investors sifted through the latest news on the U.S.-China trade front and positive results from Apple Inc. Bonds fell as Japanese yields climbed higher after the central bank said it would allow more flexibility in yield movements.

Stocks climbed in Japan and South Korea, while they drifted elsewhere in the region. In a move seen as pressuring China back to the negotiating table, the Trump administration will propose raising to 25 percent its planned 10 percent tariffs on $200 billion in Chinese imports, three people familiar with the internal deliberations said. Earlier, the S&P 500 Index capped a fourth monthly gain after Bloomberg reported that the U.S. and China were trying to restart talks aimed at averting a full-blown trade war. The offshore yuan slipped as China weakened its fixing for the currency to the lowest since May 2017.

“The tariff issue is ongoing, I think it’s a negotiating tactic,” Nick Griffin, chief investment officer at Munro Partners, said on Bloomberg Television. “How much we take of this as real and affecting earnings is questionable at this stage. In terms of an actual earnings effect, it’s not that big at the moment, it’s mainly just sentiment and risk appetite and for that it’s a moving feast.”

Central banks remained in focus after the Bank of Japan tweaked its policy settings Tuesday, with the Bank of England expected to hike rates Thursday. The yen held most of its losses from yesterday, when the BOJ move disappointed those who had seen a chance of an outright hike in the bond-yield target. Meanwhile, the Federal Reserve is expected to hold its fire at its meeting Wednesday.

Elsewhere, Apple’s Taiwanese suppliers such as Hon Hai Precision Industry Co. advanced after the company projected sales that beat analysts’ estimates. Crude added to a monthly decline on wagers for higher production.

Bloomberg.com — Canada’s economy grew at the fastest pace in a year with gains led by crude oil, further evidence of a solid expansion even as trade tensions with the U.S. remain a threat.

Gross domestic product expanded by 0.5 percent in May, faster than the 0.3 percent forecast in a Bloomberg survey of economists.

Non-conventional oil output jumped 5.3 percent for the sixth gain in seven months as more production came back online after shutdowns, Statistics Canada said Tuesday from Ottawa. Nineteen of 20 industries showed gains on the month, including retail sales rising 2 percent on the heels of weakness in April linked to cold weather.

The world’s 10th largest economy is on track for annualized growth of at least 2 percent for the rest of this year after weakness in the first quarter. Consumer spending is supported by a strong job market and some companies are boosting investment as they reach their capacity limits.

GDP grew by 2.6 percent in May from a year earlier, the statistics agency said.

Bank of Canada policy makers raised interest rates this month for the fourth time in a year and said more increases may be needed in a fairly tight economy. Investors were putting 25 percent odds on another rate increase at the central bank’s next meeting before Tuesday’s GDP report was published.

The wild card remains a growing trade fight with the U.S. that threatens the North American Free Trade Agreement and keeps pressure on other sectors including lumber and uranium. The uncertainty is holding back some new investment and curbing exports.

Industries with strong ties to exporting nevertheless posted increases in May. Transportation and warehousing climbed 0.4 percent and manufacturing was up 0.1 percent.

Highlights

• Construction advanced 0.7 percent in May, another industry that rebounded from a decline linked to cold April weather. The industry’s output is up 5 percent in the past year
• Food services and drinking places saw a 0.9 percent rise in their value added
• The utilities sector was the lone major category to decline, with a 2.4 percent drop after a 1.4 percent gain in April
• The real estate agent and broker sub-category dropped 2.7 percent in May, the fourth decline this year
  The GDP gain was almost evenly split between a 0.6 percent increase for goods-producing companies and 0.5 percent for services

Bloomberg.com — Stocks were mixed, while the yen fluctuated and Treasuries gained after the Bank of Japan refrained from broad changes to its ultra-loose monetary policy.

Japanese shares briefly pared declines, before ending near the day’s lows, as BOJ policy tweaks included a shift in purchases of exchange-traded funds toward assets linked to the Topix index. Equities dropped in Hong Kong, while moves were more muted elsewhere in the region. European futures edged lower. Japan’s government bonds jumped as the central bank indicated flexibility in its market operations, while the dollar steadied and U.S. equity futures ticked higher. Oil slipped below $70 a barrel.

The BOJ left its key interest rates unchanged while announcing policy tweaks, including reducing the amount of bank reserves subject to its negative interest rate and forward guidance for policy rates. In relation to the long-term rate, the BOJ reiterated that it will buy JGBs to keep the 10-year yield at about zero percent, but added language stating that “while doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.”

“The allocation change in the BOJ’s ETF purchases is within the market’s expectations; as long as the BOJ maintains its annual pace of the ETF buying unchanged, the overall impact on the stock market is limited,” said Naoki Fujiwara, chief fund manager for Shinkin Asset Management Co. in Tokyo. “The BOJ maintained its targets on the yield-curve control unchanged, signaling its accommodative stance hasn’t changed.”

Investors had been speculating about whether the BOJ will fine tune its stimulus programs. Now they will look for any indications the Federal Reserve is shying away from two more interest-rate hikes before the end of this year. Meanwhile, the Bank of England is widely expected to increase borrowing costs.

Earlier, China’s manufacturing purchasing managers index — the official factory gauge — dropped to 51.2 in July from 51.5 in June and lower than the forecast of 51.3 in a Bloomberg survey of economists. Factories are faced with challenges both at home and abroad, with slower credit growth this year denting demand and the imposition of the first round of U.S. tariffs.

Elsewhere, the Canadian dollar fell on a report that the U.S. rejected attempts by Canada to take part in trade talks between the U.S. and Mexico. The Australian dollar advanced after June building approvals beat estimates.

Bloomberg.com — Asian stocks began the week lower as investors questioned earnings results against lofty expectations and prepared for key policy meetings from the world’s biggest central banks. The onshore yuan added to last week’s slump, driven in part by China’s moves to ease monetary conditions.

Equities fell from Tokyo to Sydney. U.S. and U.K. equity futures signaled declines when trading begins in New York and London, after the S&P 500 Index closed weaker Friday. The yen steadied and Japan’s benchmark 10-year bond yield climbed to the highest since February 2017, amid speculation the Bank of Japan may discuss adjusting its ultra-loose monetary policy this week. The dollar ticked higher alongside U.S. Treasury yields.

Central-bank policy decisions and a slew of earnings reports, including from Apple Inc., are set to dominate moves in financial markets this week. Investors will focus on whether the BOJ will fine tune its policy and look for any indications the Federal Reserve is shying away from two more interest-rate hikes before the end of this year.

Elsewhere, oil rose toward $69 a barrel on a draft proposal to roll back U.S. automobile efficiency requirements that may increase fuel consumption. Gold and copper fell.

Bloomberg.com — Japan’s retail sales rebounded in June, recovering from a sharp drop in May and offering a sign of improved consumption in the second quarter.

Highlights

• Retail sales rose 1.5 percent in June (forecast +1.5 percent) from May, when they fell 1.7 percent.
• Sales increased 1.8 percent from the previous year (forecast +1.7 percent).
• Sales at department stores and supermarkets climbed 1.5 percent from a year earlier. […]