Friday, 15 December 2017

Asian shares slip, U.S. tax reform woes dent sentiment

TOKYO (Reuters) - Asian shares erased earlier modest gains on Friday with sentiment dented by Wall Street’s weakness on concerns about the progress of U.S. tax reform, though regional stocks remain on track for a weekly rise.

European stock futures were down 0.3 percent, suggesting a downbeat opening for the region, with DAX futures also down 0.3 percent, CAC futures down 0.2 percent and FTSE futures FFIc1 0.1 percent lower.

MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.4 percent, but poised to gain 0.8 percent for the week.

Chinese shares slumped, with the Shanghai Composite index .SSEC off 0.8 percent and the blue-chip CSI300 index .CSI300 down 1.1 percent.

Japan's Nikkei stock index finished 0.6 percent lower at its lowest in more than a week, with mobile firms extending a sell-off on concerns of increased competition after e-commerce group Rakuten said it aims to become the country's fourth wireless carrier. The index is down 1.1 percent for the week.

Big Japanese manufacturers’ business confidence improved for a fifth straight quarter in the three months to December to hit an 11-year high, the Bank of Japan’s quarterly tankan survey showed.

“The Nikkei came off its lows in the afternoon, largely on futures-led buying,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust. “But regional sentiment is still fragile, which will limit its upside.”

On Thursday, U.S. retail sales increased more than expected in November and the number of Americans filing for unemployment benefits dropped to near a 44-1/2-year low last week. That pointed to sustained strength in the economy that could pave the way for further Federal Reserve interest rate hikes next year.

The Fed hiked interest rates on Wednesday but left its rate outlook for the coming years unchanged even as policymakers projected a short-term jump in U.S. economic growth from the Trump administration’s proposed tax cuts.

“The Fed’s move this week was largely perceived as a dovish hike,” said Bill Northey, chief investment officer at the private client group of U.S. Bank in Helena, Montana.

“It was ultimately well within expectations, and I think the one surprise was how strong the upgrade was for 2018 without any corresponding upgrade for their expectations for inflation,” he said. “That keeps our expectations around three rate hikes for 2018.”

On Wall Street on Thursday, major U.S. stock indexes fell, with the S&P 500 .SPX down the most in a month, as investor worries over potential roadblocks to the Republicans' tax overhaul more than offset optimism over the strong data.

Republicans in the U.S. Congress reached a deal this week on a final version of their debt-financed legislation to cut taxes for businesses and wealthy Americans, with House and Senate votes expected early next week. But the bill has yet to get needed support of some key Senators, and investors worry about downward pressure on stocks if the bill were to fail.

The dollar index, which tracks the greenback against a basket of six rival currencies, was up 0.1 percent at 93.570, down 0.3 percent for the week.

The dollar dipped 0.1 percent against the yen to 112.26 JPY=, down 1 percent for the week, and moving away from a one-month high of 113.75 yen touched on Tuesday.

The euro was steady at $1.1782 EUR=. On Thursday, the European Central Bank raised growth and inflation forecasts for the euro area, but stuck with its pledge to provide stimulus for as long as needed.

Sterling was steady at $1.3437 GBP=. The Bank of England also left interest rates unchanged on Thursday, as expected.

Bitcoin was up 4.2 percent on the Bitstamp exchange at $17,001, after earlier matching a record high of 17,428.42 set on Tuesday.

Crude oil futures extended gains, after rising on Thursday as a pipeline outage in Britain continued to support prices despite forecasts showing global crude surplus in the beginning of next year.

U.S. crude CLc1 added 0.3 percent, or 15 cents, to $57.19 a barrel, after gaining 0.8 percent overnight. Brent crude futures LCOc1 were up 0.2 percent, or 14 cents, at $63.45.

Reporting by Lisa Twaronite

Thursday, 14 December 2017

Fed raises interest rates, keeps 2018 policy outlook unchanged

WASHINGTON (Reuters) - The Federal Reserve raised interest rates on Wednesday but left its rate outlook for the coming years unchanged even as policymakers projected a short-term jump in U.S. economic growth from the Trump administration’s proposed tax cuts.

In an early verdict on the tax overhaul, Fed policymakers judged it would boost the economy next year but leave no lasting impact, with the long-run potential growth rate stalled at 1.8 percent. The White House has frequently said its tax plan would produce annual GDP growth of 3 percent to 4 percent.

The expected fiscal stimulus, coming on the heels of a flurry of relatively bullish data, cleared the way for the U.S. central bank to raise rates by a quarter of a percentage point to a range of 1.25 percent to 1.50 percent. It was the third rate hike this year.

But the Fed’s forecast of three additional rate increases in 2018 and 2019 was unchanged from its projections in September, a sign the tax legislation moving through Congress would have a modest, and possibly fleeting, effect.

The rate increase represented a victory for a central bank that has struggled at times to deliver on its promised pace of monetary tightening. It also allowed Fed Chair Janet Yellen, at her final press conference before her term ends in February, to signal an all-clear for the U.S. economy a decade after the onset of the 2007-2009 recession.

“At the moment the U.S. economy is performing well. The growth that we’re seeing, it’s not based on, for example, an unsustainable buildup of debt ... The global economy is doing well, we’re in a synchronized expansion,” Yellen said. “There is less to lose sleep about now than has been true for quite some time, so I feel good about the economic outlook.”

But the central bank’s projections also contained some potential dilemmas for incoming Fed chief Jerome Powell.

The Fed now envisions a burst of growth, ultra-low unemployment of below 4 percent in 2018 and 2019 and continued low interest rates - yet little movement on inflation.

Yellen said the persistent shortfall of inflation from the Fed’s 2 percent goal was the major piece of “undone work” she was leaving for Powell to figure out.

In its justification for Wednesday’s rate increase, which was widely expected by financial markets, the Fed’s policy-setting committee cited “solid” economic growth and job gains.

U.S. stocks extended gains after the release of the policy statement before ending mixed, while Treasury yields dropped. The dollar fell against a basket of currencies.

Traders of U.S. short-term interest rate futures kept bets the Fed would raise rates only twice next year.

The Fed now sees gross domestic product growing 2.5 percent in 2018, up from the 2.1 percent forecast in September. The pace of growth is expected to cool to 2.1 percent in 2019, slightly higher than the prior forecast of 2.0 percent.

“Changes in tax policy will likely provide some lift to economic activity in coming years,” Yellen said, adding that “the magnitude and timing of the macroeconomic effects of any tax package remain uncertain.”


The Fed also said on Wednesday it expected the nation’s unemployment rate would fall to 3.9 percent next year and remain at that level in 2019, well below what is considered to be full employment. It previously had forecast a jobless rate of 4.1 percent for those two years.

But inflation is projected to remain shy of the central bank’s goal for another year, with weakness on that front still enough of a concern that policymakers saw no reason to accelerate the expected pace of rate increases.

“It shows at least some members of the Fed don’t see any reason to keep hiking rates in an environment where the economy is growing more strongly but certainly not overheating and where inflation hasn’t become a problem and doesn’t look like it is going to be one,” said Kate Warne, investment strategist at Edward Jones.

Policymakers do see the federal funds rate rising to 3.1 percent in 2020, slightly above the 2.8 percent “neutral” rate they expect to maintain in the long run. That indicates possible concerns about a rise in inflation pressures over time

Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari dissented in the policy statement on Wednesday.

Reporting by Howard Schneider

Bank of England's Brexit views in focus as rates set to stay on hold

LONDON (Reuters) - The Bank of England’s views on Brexit will be scrutinised by investors on Thursday when the central bank announces its first policy decision since raising rates for the first time in more than a decade last month.

Both financial markets and economists expect BoE officials will wait nearly a year before raising interest rates again - a much slower pace of tightening than the U.S. Federal Reserve.

The “very gradual” pace of tightening signalled by the BoE last month reflects both uncertainty about the economic impact of ongoing talks to leave the European Union, as well as weak underlying inflation pressures that belie a headline rate at its highest in nearly six years.

Last week’s judgement by the European Commission that Britain had made sufficient progress in Brexit talks to move on to negotiations over trade and an interim deal to cover the period until 2021 should reinforce the BoE’s assumption that the Brexit process will be smooth.

“We expect a ‘holding position’ from the BoE ... and a neutral tone on Brexit progress,” said Robert Wood, UK economist at Bank of America Merrill Lynch.

Like most economists polled by Reuters, he expects the BoE’s Monetary Policy Committee to vote 9-0 to keep rates at 0.5 percent, after a 7-2 split in favour of raising rates by a quarter of a percentage point last month.

BoE Governor Mark Carney has said the central bank will focus on consumers’ and businesses’ reaction to Brexit talks, rather than make its own judgement about the economic impact.

Wood said he did not think last week’s Brexit progress - which had been in some doubt - would make the BoE raise rates sooner in 2018.

Consumer demand has faltered this year mostly due to rising inflation - not Brexit worries - so last week’s agreement removed a downside risk, rather than pointing to stronger growth. Figures overnight pointed to the weakest housing market since 2013.

Last month the BoE maintained its forecast that the economy would grow 1.6 percent next year - slightly faster than expected by the government and most economists polled by Reuters.

Since then, inflation has risen to its highest since March 2012 at 3.1 percent. The BoE says this overshoot is almost all due to sterling’s fall after June 2016’s Brexit vote, and it expects inflation to fall slowly next year.

Wage growth - which many BoE policymakers view as a good guide to medium-term inflation pressures - remains slow, with regular pay in the three months to October up just 2.3 percent on a year earlier.

However Wolfgang Bauer, a fixed income fund manager at M&G Investments, said Brexit made the BoE the hardest major central bank to predict for next year based on economics alone.

“If there are some hiccups in the negotiation process - and I think that is very likely - we could see some pressure on sterling,” he said.

“That ... might make the Bank of England want to have a bit more of a tighter monetary policy. On the other hand, if there’s a less-than-ideal Brexit on the horizon, that might dampen economic growth.”

Reporting by David Milliken

Wednesday, 13 December 2017

With rate hike in the bag, Fed may hint at Trump effect on economy

WASHINGTON (Reuters) - The Federal Reserve is widely expected to raise interest rates on Wednesday, but, more significantly, it may give its strongest hint yet on how the Trump administration’s tax overhaul could affect the U.S. economy.

Investors will pay close attention to how the central bank aims to balance a stimulus-fueled economic boost with the ongoing weak inflation and tepid wage growth that has curbed some policymakers’ appetite for higher rates.

The Fed’s policy statement and its latest economic projections are due to be released at 2 p.m. EST (1900 GMT) following the end of a two-day meeting. Fed Chair Janet Yellen is scheduled to hold a press conference half an hour later. It will be her last before her four-year term ends early next year.

Her successor, Fed Governor Jerome Powell, said at his recent confirmation hearing before a Senate panel that he had “no sense of an overheating economy,” an early signal he may not want to quicken the pace of rate increases until there is evidence of an acceleration in wage growth and inflation.

The Fed has increased rates twice in 2017 and is currently expected to push through three more hikes next year.

Much of Yellen’s tenure as Fed chief has been defined by a desire to leave loose monetary policy in place as long as possible in the hope that unemployment continued to decline, workers rejoined the labor force, and wages rose.

Powell, who has worked closely with Yellen, said he feels that process still has room to run.

Recent bullish data, highlighted by continued solid job gains and a jump in economic growth, has prompted some analysts to speculate that the central bank’s new projections will reflect an expectation of four rate increases next year.

There are also signs inflation may be firming after a lengthy bout of weakness. Fed policymakers have been stymied at how price rises have remained persistently below the central bank’s 2 percent target despite labor market strength and a growing economy.

President Donald Trump’s proposed tax plan, including a sharp reduction in the corporate income tax, could further boost the U.S. economy if it passes the Republican-controlled Congress, as appears likely.

In a recent note projecting four Fed rate increases next year, Paul Ashworth, U.S. economist for Capital Economics, said “the stimulus could provide cover for the Fed to normalize interest rates at a faster pace than it otherwise would have been able to.”

What Ashworth called a “badly timed” tax cut “would be expected to raise inflation as much as it boosted real GDP growth,” he said.

Reporting by Howard Schneider

Dollar bounce stalls as Alabama outcome adds uncertainty

LONDON (Reuters) - A two-week rally in the dollar stalled on Wednesday after a Democrat won a bitter fight for a U.S. Senate seat in deeply conservative Alabama, injecting fresh uncertainty about the outlook for the greenback in the coming months.

Even as the U.S. Federal Reserve prepares to raise interest rates for the third time this year at the end of a two-day policy meeting in the day, traders are a bit more sceptical that policymakers will flag more rate hikes next year than the current two increases currently priced into markets.

“Expectations from the U.S. are very limited today in terms of forward guidance despite some likely optimistic assessments about the economic outlook, so the Fed decision may prove to be less supportive for the dollar,” said Valentin Marinov, head of G10 currency research at Credit Agricole in London.

The dollar was flat against a trade-weighted basket of currencies at 94.06 on Wednesday after rallying more than 1.5 percent so far this month. Despite the bounce, the dollar is down nearly 8 percent so far this year.

Democrat Doug Jones’ win deals a blow to President Donald Trump as the reduced Senate majority could make it harder for him to push through tax cut plans and other economic agenda.

“I am surprised the Alabama outcome is not having a bigger impact on the dollar,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.

Against the yen, the dollar slipped 0.2 percent to 113.35 yen , after rising to a four-week high of 113.75 yen on Tuesday.

The euro was flat at $1.1745, after slipping to a three week low of $1.17175 the previous day.

Investors are focusing more on the Fed’s projection on the pace of its rate hikes next year and policymakers’ views on the outlook for inflation.

The Fed will announce its decision on rates at 1900 GMT Wednesday followed by a statement. Chair Janet Yellen will hold a news conference at 1930 GMT.

Elsewhere, the British pound hovered at $1.3320 GBP=D3, near two-week lows of $1.3303 touched on Tuesday, although the currency was briefly propped up by data showing British inflation unexpectedly hit a near six-year high in November.

Consumer price inflation rose to an annual rate of 3.1 percent in November, above economists’ average expectations of 3.0 percent rise.

Reporting by Saikat Chatterjee

Tuesday, 12 December 2017

Dollar gains as Fed seen set to raise rates

NEW YORK (Reuters) - The U.S. dollar rose to three-week highs against a basket of currencies on Tuesday as the Federal Reserve begins a two-day policy meeting where it is widely expected to raise interest rates for the fifth time since 2015.

Investors will be watching for any signals that Fed officials are more optimistic on the prospect of faster growth as lawmakers appear close to passing a large overhaul of the tax code.

“People are looking for a little more confidence on the fact that tax legislation is set to pass,” Sireen Harajli, a foreign exchange strategist at Mizuho in New York. “The general theme is that the dollar will continue to find support as we approach the end of the year.”

The dollar index gained to 94.10, the highest since Nov. 21. The greenback rose more than 1 percent last week, its biggest weekly rise since the end of October, but is down around 8 percent this year.

Investors will also be watching the Fed’s statement at the conclusion of the meeting on Wednesday for concern about low inflation.

Fed forecasters expect three additional rate hikes next year though bond markets see two as more likely.

“Deflationary risks generally around the world are slowly receding and probably further in the rear view mirror these days than at the start of the year,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. “Global central banks seem to be more optimistic about the outlook.”

U.S. producer price data on Tuesday showed an increase in wholesale inflation, increasing hopes that price pressures may be rising from sluggish levels.

The Labor Department said its producer price index for final demand increased 0.4 percent last month.

In the 12 months through November, the PPI shot up 3.1 percent. That was the biggest gain since January 2012 and followed a 2.8 percent rise in October.

Consumer Price Index (CPI) data on Wednesday will be a key data focus for further clues on price pressures.

The New Zealand dollar set a one-month high as investors welcomed the appointment of national pension fund chief Adrian Orr to head the Reserve Bank from March.

The kiwi was last up 0.41 percent against the U.S. dollar at $0.69.

Reference: Karen Brettell

Monday, 11 December 2017

Sterling stabilises after biggest drop in a month

LONDON (Reuters) - Sterling steadied on Monday after posting its biggest daily drop in more than a month on Friday as investors cautiously added some long bets in a week when Britain and the European Union will sign off on a deal to move to the next stage of Brexit talks.

The British currency was choppy in early trading in a potentially big week with a central bank meeting scheduled on Thursday and a raft of top tier data including retail sales, inflation and jobs data also due this week.

With latest positioning data showing a growth in long sterling bets for a third consecutive week after Prime Minister Theresa May managed to break the Brexit deadlock last week, investors have become a bit more optimistic in the short term

Some analysts such as Viraj Patel, an FX strategist at ING in London, say the central bank decision this week will be closely watched to see whether policymakers will acknowledge the developments in the Brexit negotiations.

“While we suspect the statement will be largely unchanged, it’ll be interesting to see whether the monetary policy committee explicitly acknowledge the recent Brexit progress,” said ING’s Patel.

“If so, one could see this as a hawkish development – with risks sterling moves up to 1.3500/50.”

Sterling was broadly steady against the dollar at $1.3375 after falling 0.7 percent on Friday, its biggest daily drop since Nov. 2. Sterling had skidded when cautious investors booked profits after a sharp rally in previous days.

Against the euro, sterling weakened by 0.3 percent to 88.15 pence in early trade on Monday.

Reporting by Saikat Chatterjee