Week in review: Fed up being criticised
The Federal Reserve (Fed) decided to reduce US interest rates for a second time this week. The move was widely expected, and the further 0.25% cut came on the back of weakening global growth, disruptive trade policy and muted inflationary pressures. These are the same forces that drove July’s rate reduction. Investors viewed it more an insurance policy against the deteriorating global economic outlook than an indictment on the health of the US economy.
Fed Chair Jerome Powell stated that "if the economy does turn down, then a more extensive sequence of rate cuts could be appropriate," but economic projections remained unchanged.
A deepening of the divisions within the Fed did emerge, though. Seven out of the 10 rate-setting committee members voted in favour of the cut. Two others opposed it. Sandwiched between the two factions was one member who argued for a bigger 0.5% reduction. Short-dated bonds sold off in response, while equity markets generally welcomed the move.
But while the Fed gave markets largely what they expected, this wasn’t enough for the US President. Mr Trump continued on his crusade for zero interest rates. Within minutes of the rate announcement, he’d vented his fury via Twitter several times, stating the Fed has: “No guts, no sense, no vision!”
Across the pond, meanwhile, it was a case of lower for longer after the Bank of England kept rates on hold and signalled they would stay low while Brexit uncertainty drags on. The Bank of Japan was similarly unmoved.
Overall, both the S&P 500 and the FTSE World Europe ex-UK finished flat to Thursday’s close. The FTSE 100, meanwhile, was 0.15% lower.
The Fed certainly earned its money this week. It was forced to intervene several times in the repo, or repurchases, market when its federal funds rate spiked significantly higher than its desired target.
In essence, the repo market ensures banks and hedge funds have enough cash to meet their short-term, day-to-day needs. Most of the time, it ticks along in the background, quietly doing its thing.
The types of gyrations seen in recent days, however, usually reflect fear in the market. In fact, the last time the repo market garnered such prominent headlines was probably in the early days of the financial crisis. This time though, we do not appear to be heading for financial catastrophe or a breakdown in interbank lending; rather some temporary strains.
For one, the market has struggled to digest large-scale US Treasury issuance, which banks’ balance sheets have been unable to absorb due to regulatory constraints. Tax payments, meanwhile have sucked further liquidity out of the system. All of this prompted the large increases in overnight repo and other short-term rates.
For four consecutive days, the Fed has conducted repurchasing operations; temporarily buying US stocks in order to inject liquidity and ensure that credit continues to flow through the financial system.
Take your pick from a slew of election news – either actual or threatened. Israel’s second election in five months took place this week. The result was inconclusive with no party winning a majority. Incumbent right-wing Prime Minister Benjamin Netanyahu has reached out to his centrist opponent Benny Gantz to “form a broad unity government". Let the coalition games begin.
Meanwhile, Spain looks like it is heading back to the polls for the fourth time in as many years. This comes after talks to break the country’s political deadlock broke down. Spain has been left in political limbo since April’s inconclusive election result and the failure of socialist leader and acting Prime Minister Pedro Sanchez to form a stable government. And what a difference a week makes in Italy. Less than seven days after forming the country’s very fragile coalition government, former prime minister Matteo Renzi has abandoned the union to form his own breakaway party. No surprise that he has earned the nickname ‘demolition man’.
Boris told to Finnish it
Brexit negations stepped up a gear – at least in terms of rhetoric. Following Boris’ mini-break to Brussels earlier in the week, the EU warned of the “palpable risk” of a ‘no-deal’ Brexit and accused the PM of “pretending” to negotiate. Most vociferous of all though was Finland’s PM who, under the instruction of French President Macron, ordered his UK peer to submit “written proposals” for his Brexit plan before 30 September, otherwise “it’s over”. Meanwhile, the legality of Mr Johnson’s decision to prorogue parliament was debated in the Supreme Court with a decision due next week.
In good company
In company news, property giant Blackstone looks to be living the dream with its latest spending spree. It has launched its $20.5 billion real estate fund with the $4.7 billion purchase of Canada’s Dream Global REIT. It’s been less life-affirming, however, for General Motors workers at the company’s Detroit assembly plant. For the first time since 2007, the workers are out on strike, protesting for better healthcare, pay and benefits. This comes at a time when the US labour market is tight but the auto industry is undergoing structural change globally.
Finally, ThyssenKrupp is probably feeling uplifted as a multi-billion-euro battle heats up for its elevator business. Advent International, Cinven and the Abu Dhabi Investment Authority are teaming up to acquire it. Their bid, however, is likely to face competition from both Kone, the Finnish lift maker, and Japan’s Hitachi. We’d love to hear their elevator pitches for the $20 billion business.
With all this week’s shenanigans and high jinks on the markets, you might be feeling in need of a little support. One man in New Zealand took his need for comfort a bit too far, when he called for some circus-themed assistance. The Kiwi copywriter appeared at an interview, at which he suspected he would be made redundant, with an emotional support clown. Clearly, redundancy is no laughing matter but the idea could catch on.
So if you think your career might be tumbling a bit, or the corporate high wire is getting somewhat shaky, it might be time to send in the clowns.
Editorial image credit - Andrew Harrer/Bloomberg via Getty Images
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