While you were sleeping: US rate hike in focus

Wednesday 5th October 2016

Wall Street declined as the latest comments from Federal Reserve officials underpinned bets the central bank will raise interest rates, possibly as early as next month.

“I would expect that the case would remain compelling” for a rate hike when the Federal Open Market Committee gathers in Washington November 1-2, Cleveland Fed President Loretta Mester told Bloomberg in an interview.

Meanwhile, Richmond Fed's Jeffrey Lacker told reporters he would have voted in favour of an interest rate increase at the central bank's September policy meeting had he been able to vote, according to Reuters.

"While inflation pressures may seem a distant and theoretical concern right now, prudent pre- emptive action can help us avoid the hard-to-predict emergence of a situation that requires more drastic action after the fact," Lacker said in prepared remarks for a speech in Charleston, West Virginia.

"The current target range for the federal funds rate, at 25 to 50 basis points, is extremely low relative to the benchmarks I discussed earlier that capture historically successful policy," Lacker noted.

Wall Street fell. In 1.42pm trading in New York, the Dow Jones Industrial Average declined 0.6 percent, while the Nasdaq Composite Index fell 0.3 percent. In 1.27pm trading, the Standard & Poor’s 500 Index dropped 0.6 percent.

Slides in shares of 3M and those of Verizon Communications, last down 2 percent and 1.4 percent respectively, led the Dow lower. Bucking the trend were shares of Goldman Sachs and those of Apple, recently up 0.4 percent and 0.3 percent respectively, for the largest percentage gains in the Dow.

Even so, the International Monetary Fund downgraded its forecast for US economic growth this year, reducing it to 1.6 percent, down from 2.2 percent, in its October 2016 World Economic Outlook.

Further increases in the Federal Reserve’s policy rate “should be gradual and tied to clear signs that wages and prices are firming durably,” the IMF warned.

“Taken as a whole, the world economy has moved sideways,” IMF chief economist and economic counsellor, Maurice Obstfeld said in a statement. “We have slightly marked down 2016 growth prospects for advanced economies while marking up those in the rest of the world,” he said.

In Europe, the Stoxx 600 Index ended the session with a gain of 0.8 percent. Germany’s DAX Index added 1 percent, while France’s CAC 40 Index rose 1.1 percent, and the UK’s FTSE 100 Index climbed 1.3 percent.

While the pound dropped to a fresh 31-year low, UK stocks advanced.

“The falling pound has benefited UK equities and has been good for the UK’s exporters,” Pierre Mouton, a fund manager at Notz, Stucki & Cie in Geneva, told Bloomberg. “The economic numbers are OK in Europe. The next three to four weeks will be very important, with companies giving their results for the quarter.”

But the pound’s weakness reflects concern about the impact of UK’s exit from the European Union.

"It is now abundantly clear that access to the single market is not on (UK Prime Minister) Theresa May's list of top priorities and the market is realising that ... there is more pressure for the pound in the weeks and months ahead," UniCredit global head of FX strategy Vasileios Gkionakis told Reuters.

Bonds on both sides of the Atlantic weakened after Bloomberg reported that the European Central Bank will probably gradually wind down bond purchases before the conclusion of quantitative easing, and may do so in steps of 10 billion euros (US$11.2 billion) a month. The report cited euro-zone central-bank officials who asked not to be identified because their deliberations are confidential.

BusinessDesk.co.nz

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