FT : Donald Trump’s demands add to Federal Reserve interest rate headaches Polit

Donald Trump’s demands add to Federal Reserve interest rate headaches
Political pressure for a cut makes the US central bank’s next decision vexed

Donald Trump’s renewed public demand for easier monetary policy has injected a further political dimension into decision-making at a Federal Reserve that is anxious to display its independence. 

Having raised interest rates four times last year, the US central bank faces a debate over whether the next move will need to be down rather than up. The president’s willingness to trample over the Fed’s independence will only make the next decision more vexed given central bankers’ desire to prove they are not being steered by politicians. 

“To expect that the next move might be a cut is not crazy,” said Joe Gagnon, a former Fed official who is now at the Peterson Institute for International Economics. However “it is awkward for them to do what he has asked them to do”. 

Following fears of a recession in the bond market, optimism about the US economy revived late last week, with March jobs growth approaching 200,000 and unemployment hanging at just 3.8 per cent. The numbers were easily strong enough to reinforce the Fed’s central case for 2019, namely for respectable economic growth and unchanged interest rates.

But the case for a rate cut could yet materialise this year. If the US sees signs of a serious downturn there is little doubt that chairman Jay Powell and his colleagues would cut aggressively. Some officials could start seeing arguments for a downward move even if the economy is not falling off a cliff. 

It would take a lot of disappointment from here to get a cut

Michael Feroli, JPMorgan Chase 
The rate adjustments under former Fed chairman Alan Greenspan during the record-breaking expansion of the 1990s serve as one set of precedents. Charles Evans, the Chicago Fed president, in late March discussed Mr Greenspan’s rate cuts during the 1998 emerging markets crisis as an example of what he calls a “risk management” approach to policy.

The Fed lowered rates even though US unemployment was just 4.6 per cent and America’s gross domestic product growth remained steady. It was an example, Mr Evans said, of the Fed easing policy “as insurance against bad outcomes”.

Bill English, a Yale professor who used to be director of the Fed’s division of monetary affairs, said reductions pushed through by the Fed earlier in the 1990s are also relevant. In July 1995 the Fed started reversing an earlier series of rises by lowering rates by a total of three-quarters of a point — even though the economy was by no means cratering.

If the US economy slows later this year and inflation is low, the Fed could make a similar “midcourse correction”, Mr English said. Adding to present-day arguments for the Fed to act pre-emptively is the relatively low current level of neutral interest rates — rates that neither stimulate growth nor hold it back. This is leaving the central bank only modest firepower to prop up the economy.

“You react more sensitively to slower growth than in normal times,” Mr English said. “You might want to lean in the direction of easier policy to provide more of a buffer against downside shocks.”

Michael Feroli of JPMorgan Chase questioned arguments for rate cuts, saying the US is on course for above-trend economic growth. The 1995 reductions were a necessary response to excessive tightening the previous year, he said, and in 1998 the Fed was reacting to a genuine market crisis. The situation is different today. “It would take a lot of disappointment from here to get a cut,” he argued.

Alan Blinder, a former Fed governor who is now at Princeton University, said that as a general rule the Fed needed to be ready to move pre-emptively in both directions, but it was not currently clear to him that risks of worse than expected outcomes were overshadowing those of quicker inflation.

While Fed officials including Richard Clarida, the vice-chairman of its board, have been highlighting global hazards such as trade tensions, slowing growth and Brexit, the US has generally proved to be resistant to foreign shocks. The danger for the Fed is that any hint it had started to consider a rate reduction could panic financial markets, as traders ask whether the central bank sees a dire prognosis they have overlooked. 

The Fed would also need to confront one of the principal critiques of Mr Greenspan’s 1990s policy — namely that it was so loose that it stoked up hazardous bubbles in financial markets. The cuts in late 1998 have been criticised in particular as being ill-advised and unnecessary. “You don’t want unintended consequences like a sharp appreciation in housing,” said Diane Swonk of Grant Thornton. “You could have bigger bubbles in financial markets.”

Accusations that Mr Powell caved to presidential pressure in shelving the Fed’s rate-raising campaign early this year are further bedevilling the policy outlook. An outright cut would reinforce claims that Mr Trump is influencing policy at a central bank that jealously guards its independence. “It makes the job more complicated — and it’s already a complicated job,” Mr English said. “It’s unfortunate.”

>>> Barrons weekend summary: positive feature on FL

Barrons weekend summary: positive feature on FL

* Cover story: The bull market recently hit 10 years, and it could rally for another 10—in general, bearishness rests on the fact the it has lasted for so long; “The yield curve briefly inverted, but even some investors who remain cautious on the U.S. market warn against reading too much into it”; Barron’s spoke to three strategists—Thomas Lee of Fundstrat Global Advisors, Binky Chadha of Deutsche Bank, and Dubravko Lakos-Bujas of JPMorgan—each of whom makes a case for continued bullishness.

* Features: 1) After interest rate increases, the one-year Treasury bill yields 2.4%, prompting the question of whether ultra-short funds, which buy high-quality bonds with durations of less than one year, can keep up—the average ultra-short fund has only a 1.2% five-year annualized return, according to Morningstar; 2) The current market is testing the resolve of even the most dedicated value investors, who haven’t lost money, but have watched growth managers steadily gain ground; over the course of this market cycle, however, the gap between value stocks and growth stocks has gotten so large, and been so persistent, that some wonder if value will ever catch up; 3) Positive on BLK, Vanguard Group, STT: Firms each offer a comprehensive line of exchange-traded funds at hard-to-beat prices, and they essentially dominate the industry, holding 80% of ETF assets in about 600 products—raising questions about whether that concentration of power is stifling competition; 4) Treasury yields have been falling, typically an indicator of a weakening economy, yet bonds issued by risky companies have been rising sharply, which usually happens when the economic outlook is bright; the confusion creates opportunity for investors who know where to look; 5) Positive on FL: The shoe chain has gotten past the problems it faced two years ago, and last year began to expand in Asia, with stores in Singapore, Hong Kong, and Malaysia—earnings per share growth could rise by 13-16% through 2023; 6) Cautious on CGC, ACB, TLRY: There are currently no bargains among hemp or marijuana stocks these days, though eventually CBD—the hemp extract cannabidiol—will be big as it joins other wellness additives in products ranging from skin cream to pet food.

* Tech Trader: Barron’s tested AT&T’s first-ever 5G smartphone feed—a live, commercial mobile network based on Release 15, an industry standard agreed upon in June—and found the service impressive, but limited; rival VZ’s 5G service is only available in select neighborhoods in Chicago and Minneapolis, and can be used only on a specific Motorola phone.

* MFQ: Mutual fund managers are the new breed of activist investors—they’re taking a larger role in challenging companies to do better, but they’re doing so quietly to help the company, and its stock, over the long term; related story says that in the past, fund managers simply sold a stock if they didn’t like what a company was doing, but today they are increasingly nudging companies whose shares are trading for far less than they should be to make changes that will close the valuation gap.

* Interview: Ruchir Sharma, chief global strategist and head of emerging markets at Morgan Stanley Investment Management, sees global markets at an inflection point: U.S. tech stocks and global multinationals could struggle, while emerging markets are poised for a revival

* European Trader: Cautious on Just Eat: A recent spike in shares follows agitation from an activist investor, but the firm is without a leader after Peter Plumb stepped down in January, and it faces a raft of challenges that could hurt growth.

* Emerging Markets: At least eight Chinese unicorns raised more than $1B through initial public offerings in Hong Kong or the U.S. last year, offering a smorgasbord of access to the country’s burgeoning economy—but “nearly all the issues have been dogs.”

* Commodities: A new deluge of rain in the Midwest looks set to hit already waterlogged soil, possibly sending wheat prices soaring; to play the strong market, investors could buy WEAT, which tracks the price of futures, or shares of FMC, which sells crop-protection products.

* Streetwise: “Interest rates are falling, growth is scarce, and there is a glut of investment dollars. That means Wall Street is setting up perfectly for a flight to nonsense,” says columnist Jack Hough in a piece about LYFT, Uber, and other money-losing startups that are going public. Related ( VZ STT T FL BLK )

>>> Week End Papers Summary

* NYT (Saturday): Donald Trump called on the Federal Reserve to cut interest rates and take additional steps to stimulate economic growth, his latest attempt to put the traditionally independent central bank under his thumb; Trump’s personal lawyer said the president can keep his tax returns private and told the Treasury Department not to hand the returns over to House Democrats, creating the potential for a far-reaching legal fight that could reach the Supreme Court; An analysis by The New York Times of recent terrorism attacks found that at least a third of white extremist killers since 2011 were inspired by others who perpetrated similar attacks, professed a reverence for them, or showed an interest in their tactics; Trump’s trade war with China is nearing a possible truce, but global companies are nevertheless moving to reduce their dependence on Chinese factories to make the world’s goods; Ignoring pressure from Washington, crown prince Mohammed bin Salman of Saudi Arabia escalated his crackdown on even mild dissent with the arrests this week of at least nine intellectuals, journalists, activists and their family members—including two dual Saudi–American citizens; A large group of TV writers affiliated with the Writers Guild of America claim the major talent agencies have been enriching themselves at the expense of their clients; (Sunday): Front page story reports a fungus called “Candida auris” that preys on people with weakened immune systems is quietly spreading across the globe, and has been found in New York, New Jersey, and Illinois, leading the federal Centers for Disease Control and Prevention to add it to a list of germs deemed “urgent threats”; A month before a national election, the worst rolling blackouts in years are regularly plunging South Africans into the dark, with warnings of “load-shedding” popping up on cellphones, ahead of power cuts imposed to prevent a collapse of the national electricity grid; Sunday Business: The Australian economy has gone nearly 28 years without a recession, but many in the country are cautious about the future, and there is little evidence among business people and government officials of triumphalism; Modern monetary theory—which says that annual deficits are too small and the U.S. can essentially print money to pay off its debt—has long been criticized by experts, but is now attracting some fans on Wall Street; Investment fees are so low that many investors may have assumed there is no more room to drop—but fees are on the verge of falling below zero, and some major companies will soon be paying customers to invest with them, according to investment research firm Flowspring.

* WSJ (Weekend): Front page story reports “The battle for new listings—and the perks NYSE and Nasdaq are willing to offer to lure potential clients—is set to be epic this year, with values potentially beating the record set during the dot-com frenzy”; The Trump administration is set to designate Iran’s Islamic Revolutionary Guard Corps as a foreign terrorist organization, a step that would vastly escalate the American pressure campaign against Tehran—but which has divided U.S. officials; If the world was at risk of sliding into recession, policy makers appear to have pivoted in time to prevent it—in the U.S. a slowdown never got started, while in the rest of the world, the panic that gripped financial markets last year appears to have been misguided; +/- BA: The FAA’s acting head told lawmakers there were no systemic problems with the qualifications of staff who helped establish training for Boeing’s grounded 737 MAX jet; + FB: A Wall Street Journal/NBC News poll found that Americans have a paradoxical attachment to social media: they regard services like Facebook to be divisive and a privacy threat but continue to use them daily; A mounting conflict in Libya following a renegade commander’s attack on Tripoli could upset the global supply of oil, and increases the likelihood that the U.S. will renew waivers for some buyers of Iranian oil; Trade talks between Chinese and U.S. negotiators concluded in Washington with no clear timeline for resolution, but with both sides touting progress and vowing to continue talking via videoconference; A new rule form the Consumer Financial Protection Bureau gives an upgrade to prepaid payment cards and mobile services, giving users the same protections as those for bank debit-card customers; + SCHW: The firm launched Schwab Intelligent Portfolios Premium, which after an initial $300 fee costs $30 per month for unlimited access to financial planners and online tools that can help clients set objectives, define risks, minimize taxes, save for college, finance a home, manage debt; Former Nissan chairman Carlos Ghosn will be held in jail until at least April 14 without possibility of bail, after being arrested on fresh suspicions of financial misconduct less than a month after he was released on bail; A new set of principles unveiled by the International Competition Network aims to make the process by which antitrust laws are enforced more transparent, predictable and consistent across international jurisdictions; H.O.T.S.: “China’s efforts since the economy’s deep downturn in 2015 have helped stave off an immediate financial crisis, but they severely damaged the dynamic private companies that drive growth”; Friday’s jobs report makes the Fed’s stance look too cautious, but since it won’t soon grow hawkish, the situation for stock investors looks promising; SNAP hosted its first annual partner summit, announcing new features and collaborations across its platform, including lens updates for its camera, augmented reality, video and gaming.

* FT (Weekend): European Union leaders “have given a cool response to Theresa May’s request for a further short delay to Brexit, as the EU wrestled with whether to postpone Britain’s departure from the bloc for up to a year”; The prospective appointments of two Trump loyalists to Federal Reserve board are raising concern among analysts and some lawmakers, particularly in light of Trump’s move to pressure chairman Jay Powell to ease monetary policy; Big Read piece says Nordic banks that believed they’d found an opportunity in the Baltic region now find themselves enmeshed in a Russian money-laundering scandal that threatens the reputation of entire countries; Lex Column: Hoteliers continue to fight for share in a market that continues to grow along with the number of wealthy people in the world who want top-notch service; Newly launched “hyperlocal” social networks will still have to compete with the big players; “Listed UK retailers are as fashionable among investors as steam trains and telegraph machines”; Comment: A more protective EU that strong defends its interests and relies less on “soft power” than in the past is arguably a necessary condition for defeating political extremism and populism inside the bloc.

* NY POST (Saturday): +/- MS: The bank is trying to distance itself from its role in helping early LYFT investors bet against the ride-hailing company after Lyft threatened to sue the bank and report it to regulators; (Sunday): Wall Street is hiring professionals to profit from a mountain of near-junk debt ahead of a looming global credit crunch that could roil markets and torpedo funds and businesses. Related ( RAGSX )

>>> US Close Dow +0.15% S&P +0.46% Nasdaq +0.59% Russell +0.96%


Closing Stock Market Summary

The S&P 500 gained 0.5% Friday in a broad-based advance that was supported by a Goldilocks Employment Situation Report for March. The benchmark index advanced for the seventh straight session, increased its weekly gain to 2.1%, and closed within ten points of the 2900 level.

The Dow Jones Industrial Average (+0.2%), the Nasdaq Composite (+0.6%), and the Russell 2000 (+1.0%) extended their weekly gains to 1.9%, 2.7%, and 2.8%, respectively.

The S&P 500 energy sector (+1.7%) led the advance as oil prices ($63.10/bbl, +0.86, +1.4%) rose on labor market strength in the U.S. and heightened geopolitical risk in Venezuela and Libya. Conversely, the materials sector (-0.1%) was the lone group that finished lower.

Stocks began the day modestly higher after the release of the employment report and proceeded to drift sideways throughout the day. The March report featured solid nonfarm payrolls growth of 196,000 (Briefing.com consensus 170,000) and no inflation pressure, as average hourly earnings growth decelerated to 3.2% yr/yr from 3.4% yr/yr in February.

In brief, this report accomplished three important things: (1) the yr/yr moderation in wage growth will keep the Fed sidelined (2) it exposed February's weak payrolls data to be an aberration and (3) it helped quiet recession concerns.

As for trade, nothing concrete came out of this week's high-level talks in Washington, although the tone remained constructive and hopeful about getting an agreement finalized. President Trump said it will be known probably in the next four weeks or so if a deal gets done.

Corporate news was light, although there were some notable analyst recommendations. Dow Inc (DOW 57.24, -2.47) lost 4.1% after JP Morgan initiated the stock with an Underweight rating; Boston Beer (SAM 268.33, -15.67) lost 5.5% after Goldman Sachs downgraded the stock to Sell from Neutral, citing expectations for slowing sales growth; and Intel (INTC 55.60, -0.32) dipped 0.6% after Wells Fargo cut its rating to Market Perform from Outperform.

U.S. Treasuries finished little changed, although they did see an uptick from early lows after the jobs report. The 2-yr yield increased one basis point to 2.34%, and the 10-yr yield decreased one basis point to 2.50%. The U.S. Dollar Index increased 0.1% to 97.39. 

Reviewing Friday's economic data, which included the Employment Situation Report for March and the Consumer Credit report for February:

  • Nonfarm payrolls increased by 196,000 in March (consensus 170,000) while nonfarm private sector payrolls increased by 182,000 (consensus 160,000).  Avg. hourly earnings rose just 0.1% (consensus +0.2%).
    • The key takeaway from the March Employment Situation Report is that it had that Goldilocks hue again of solid job growth and no inflation worries.
  • Total outstanding consumer credit increased by $15.2 billion in February (consensus $18.0 billion) after increasing an upwardly revised $17.7 billion (from $17.0 billion) in January.
    • Once again, credit growth was rooted in nonrevolving debt, like car loans and student loans, while revolving credit (credit cards) expanded at a more muted pace.

Looking ahead, investors will receive the Factory Orders Report for February on Monday.

  • Nasdaq Composite +19.6% YTD
  • Russell 2000 +17.4% YTD
  • S&P 500 +15.4% YTD
  • Dow Jones Industrial Average +13.3% YTD

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:

  • GBX +3.2%

Other news:

  • BOOT +7.2% (to join S&P SmallCap 600)
  • CCS +7% (ticking higher; to join S&P SmallCap 600)
  • ZYNE +3.6% (continued momentum)
  • ACB +3.2% (selected by the German Federal Institute for Drugs and Medical Devices as one of three winners in the public tender to cultivate and distribute medical cannabis in Germany)

Analyst comments:

  • CRBP +4.5% (initiated with a Buy at Jefferies)
  • BBBY +3.5% (upgraded to Equal-Weight from Underweight at Morgan Stanley)
  • FOLD +1.4% (initiated with a Buy at Janney)
  • LPX +1.3% (upgraded to Overweight from Equal-Weight at Stephens)
  • WY +1.3% (upgraded to Overweight from Equal-Weight at Stephens)
  • CFX +0.9% (resumed with a Buy from a Neutral at Goldman)