What will the Fed signal for 2019?
Wednesday’s meeting of Federal Reserve policymakers is their last of 2019 and, arguably, the most important. They are widely expected to raise rates for the fourth time this year to a range of between 2.25 and 2.50 per cent, but is what they signal for next year that should help shape asset allocation decisions for 2019.
The most recent comments from Jay Powell, the Fed chair, that the level of interest rates are “just below neutral,” was taken by some investors as a sign that the Fed was preparing to use this week’s meeting as a chance to dial back its projections for how much further it will raise rates next year. Mr Powell’s press conference will be closely watched.
Policymakers meet against a backdrop of a flattening yield curve, emerging cracks in credit and increased volatility in equities. Investors will be looking to see if the central bank is becoming more cautious about the outlook next year for the US economy, where the impact of tax cuts will fade and the threat of slowing global growth remain.
Analysts at FTN Financial point out that “when economic opportunity fades, animal spirits sour well before evidence of a hard slowdown shows up in the data.” Traders and investors will want to know the Fed’s view on this point. Daniel Winter
Is more Chinese stimulus on the way?
A run of weak Chinese economic data are raising the prospect of further stimulus and, sets the stage for the Central Economic Work Conference in China on Tuesday.
Chinese retail sales grew at the slowest pace in 15 years in November, while factory output was the weakest in nearly three years, figures last week showed.
Although Beijing authorities have injected cash into the banking system and have committed to channelling more funds into infrastructure, the lacklustre data raise the possibility of further stimulus measures to boost the slowing economy.
Plans for stimulus and economic growth would be a focus at Tuesday’s conference, analysts said.
Greater fiscal spending, such as tax cuts, and more monetary policy easing, including further reductions to the bank’s required reserve ratio, are potentially on the cards. Although the meeting will set the growth target and fiscal and monetary policy stances for next year, details will be outlined at the National People’s Congress in March.
“We expect that the government will need to put out a pro-growth plan as well as open up more markets for foreign investments during the Central Economic Work Conference,” said Iris Pang, Greater China economist at ING.
She said she was expecting “sizeable” fiscal stimulus of about Rmb4tn a year in 2019 and 2020, comparable in size to the level of stimulus in 2009-2011. Emma Dunkley
A quieter week for the pound?
The pound is set for further turbulence until at least January 21 as unknowns about the UK government’s Brexit plans multiply following a chaotic week for UK politics and for the currency.
Sterling chalked up both declines and successive gains of about 1.5 per cent throughout last week. December 10 proved to the be the third worst trading day of the year for sterling, when the currency saw a 1.3 per cent decline triggered by UK prime minister Theresa May’s decision to postpone a parliamentary vote on the government’s Brexit deal. This drove the pound to its lowest levels against the dollar since April 2017.
Mujtaba Rahman, Europe managing director at the Eurasia Group, warned that Mrs May remaining prime minister “almost guarantees another crisis in the new year, before a messy pivot to Plan B,” citing ever-depleting patience on the Brexit issue from EU negotiators. Eva Szalay
Will London’s derivatives industry get more clarity?
Some traders and executives may be wondering if this is the last pre-Christmas week they get to work in London, because the possibility remains that Brexit could force them to relocate in coming months.
Brussels is this week likely to finalise the licences that will give EU derivatives traders temporary access to critical UK clearing houses, which handle about €660tn of trades, for the next two years. That reassurance may only serve to underline the host of unresolved questions over how traders in London and the EU can access the “other” capital markets, should Britain crash out without a deal.
These issues include permissions for EU banks to trade on London infrastructure. Some institutions are considering moving their brokers to the EU to guarantee they can trade securities and derivatives on behalf of customers and decisions may come early in the new year.
European regulators will hold meetings this week to sign off on outstanding issues. Executives are hoping for more clarity before pressing on with their contingency plans. Philip Stafford