James A. Garfield lived three decades too early to witness the creation of the modern Federal Reserve, but the US president was in no doubt over the power of a modern central bank. He is attributed to saying “whoever controls the volume of money in any country is absolute master of all industry and commerce.”
When that power is exerted by committee, however, it can be tamed somewhat by division. Last week, the world’s leading central bank was caught. On the one hand, trade disputes show signs of beginning to drag on US economic growth, not least in manufacturing. On the other, the services sector is performing well and consumer spending shows few signs of flagging.
Throughout the week, the Fed pumped billions of dollars into the market to respond to a cash access problem for banks – the Fed’s first unscheduled intervention in money markets since the financial crisis. The intricacies of why it made the move – a spike in the repo rate – got many investors worried, suggesting that many companies and banks were short of cash. The Fed’s actions dealt with the immediate challenge, but the demand for cash is widely expected to continue to rise, meaning the Fed might need to consider whether to provide more support for the market.
When it came to rates, the Fed delivered the level of support expected, cutting another quarter point off the base rate, thereby taking it down to 1.75-2%. The Fed’s ‘dot plot’ of forward guidance suggests no more cuts in 2019 or 2020, but the Federal Open Market Committee was divided (and even the rate cut represented a midpoint of opinion, not a unanimous position); such divisions make it even harder than usual for onlookers to make any assumptions. “I think we’ll learn quite a lot in the next six weeks,” said Jerome Powell after the meeting. But if investors will just have to wait and see on the rates front, he did at least make clear that short-term interventions will remain the go-to tool in the coming months.
Other central banks are showing similar signs of dovishenss. Last week, the People’s Bank of China injected some $17 billion into the market and narrowly trimmed its one-year lending rate in an attempt to stimulate markets. China was one of a number of major economies that saw its growth forecast downgraded by the OECD last week. (The organisation said the global economy is now set to grow at its slowest pace since the financial crisis.) But while China’s rate was downgraded by 0.2%, the euro area’s was dropped by 0.4%. Moreover, while the headline Chinese growth rate slipped to 6.2% in the second quarter, three leading economists who advise the Chinese government said last week that a drop to 4 or 5% was both plausible and manageable; the larger size of the Chinese economy means it can absorb any new labour supply with a smaller rate of growth, or so goes the argument.
The Bank of England, meanwhile, kept rates unchanged at 0.75% but said that it expected rates to stay low for longer than previously anticipated. Although it forecast the UK would avoid a recession in 2019, it said that Brexit and global trade uncertainties were weighing on growth. The FTSE 100 ended the week roughly where it had started, and sterling had a relatively calm few days, given recent turmoil. The Bank of Japan said its inflation targeting is not working as well as hoped and hinted at taking further action in October.
While central banks look to keep the money taps open, Saudi Arabia is seeking to do the same for oil. Riyadh even went so far as importing oil to ensure it could continue to satisfy its customers after the recent oilfield attacks. Furthermore, reports last week claimed that the administration was leaning heavily on major Saudi families and businessmen to buy into the (much delayed) initial public offering of Saudi Aramco, the state oil group that, once public, should be the largest listed company in the world; the Saudi administration is hoping the company will be valued at $2 trillion. The price of oil has had a rocky ride in 2019 and last week Brent crude pushed back above $65 a barrel. Having spiked first thing last Monday morning, courtesy of the oilfields attack, the S&P 500 Energy index then slowly declined over the course of the week.
The crown prince may be used to getting much of what he desires, but his power is not absolute, as the Queen well knows. Last week it emerged that Elizabeth II had said she is the only woman to have ever driven the king of Saudi Arabia (women are barred from driving in the kingdom). Yet the source of the report was David Cameron, who disclosed a surprising amount about his prime ministerial meetings with the monarch, drawing criticisms from the Palace. Meanwhile, the Supreme Court continued to deliberate on whether the current prime minister had lied to the monarch over his reasons for requesting a prorogation of parliament.
The British might have a reputation for not expecting all that much from their politicians; but any politician who messes with the monarchy has cause to fear the court of public opinion. Many pundits argue that the current constitutional crisis has begun to politicise the monarchy, especially now the executive is at odds with the legislature – and potentially the judiciary, too. Whatever the ultimate Brexit destination, it still feels a long way distant.
Given the continuing uncertainty over Brexit, last week’s decision by the Bank of England to keep interest rates on hold was not a surprise. Yet it’s clear that banks and building societies are expecting the next move to be downwards.
Latest figures from Moneyfacts show that all average fixed rates on savings have fallen for the third consecutive month; the last time that happened was three years ago when the base rate was cut to 0.25%. It’s a similar story for Cash ISAs – for the first time since November 2016, variable and fixed average rates have fallen simultaneously. The average Cash ISA notice rate is now 1.16%.
Inflation dropped to 1.7% last month, but the figures confirm savers’ ongoing struggle to maintain the spending power of their money. However, in the uncertain climate, it seems they are valuing accessibility over returns; £3.2 billion was deposited into easy access accounts in July – 38% higher than in June.1
1Bank of England, Bankstats, August 2019
In The Picture
Food retail in the UK may be a notoriously competitive business, but neither that nor some mixed earnings is stopping Aldi, which recently announced that it would open, on average, a new store in the UK every week for the next two years.
The Last Word
Now everybody can pretend they are a travel agent. They’ve got access to all the airline seats, hotel beds, car rentals in the world and they can put things together themselves.
Simon Calder, travel journalist, delivers a postmortem for Thomas Cook following the airline’s collapse
The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.
© S&P Dow Jones LLC 2019; all rights reserved